“I don’t have to file” or “I don’t have to declare that income”: Myths of Freelance Taxes
Notions that are too often believed in the freelance community but which simply are not true
- “I don’t earn enough to file.” How much do you have to earn to file an income tax? $10,000, $7500, $5000? None of the three? The answer is $400. How is that possible? If you are a freelancer and if you make $400 after expenses, you have to pay self-employment taxes (which includes FICA and Medicare). Additionally, if the IRS gets a 1099 for $600, it won’t know if you had 0 expenses or $300 in expenses. It simply knows that you made the $400 or more needed to file a tax return because $400 is the cut off for filing a tax return.
- “I don’t have to include that money because I didn’t get a 1099.” 1099’s are generally sent to freelancers who earn $600 or more. They tell you what the person who paid you thinks they gave you. (You should always check to see if it’s accurate.) 1099’s are often filed for people earning under $600. The myth, though, is that if you didn’t get a 1099, you don’t have to file. Besides the fact that people often don’t file 1099’s on time which would mean you might get one in August or that they might not have your current address, you are obligated to put all the money you earned in as gross receipts whether or not you received a 1099. That also means you have to include the money even if you earned less than $600 from someone.
- “I don’t have to include that money because I ‘got it under the table’.” There is no such thing as “under the table” or “off the books”. All money received as a freelancer in exchange for work done must be included as income. There are those people who want to believe that being paid in cash doesn’t count. They talk about it sometimes as if it were a quasi-legal category. It is not quasi-legal. It is not correct. To repeat: all money received as a freelancer must be included as income. There are areas in taxes that are disputable. This one is not.
- People who are paying you in cash are often doing so in order to pay you at a lesser rate or to avoid taxes themselves. Where this leaves you is that there is often the feeling (not unjustified) that you don’t have enough money to pay your taxes. That doesn’t mean that you don’t owe them.
- Sometimes a freelancer might ask, “How would the IRS know?” First, the IRS knowing or not doesn’t make what you do right. Second, when the IRS audits, they often go through your accounts. They are trained to spot where cash might be used. They are also trained to do lifestyle audits where they match how you live to what you declared. It is illegal to under declare your income and if they discover it, they do not look kindly on it.
- “It doesn’t count as income; I bartered for it.” Let’s take a look at what barter is. You give something to someone in exchange for receiving something. What are you giving? Say you are giving a painting that you’ve made. In exchange you are receiving something. The person who is exchanging with you will give you approximately $2000 worth of dental work. The first thing to understand is that the word “give” is misleading and incorrect. The reality is that in essence you are exchanging something worth $2000 and receiving something worth $2000. Whether it’s a painting, another type of object, or services that you are exchanging, you are supposed to include that amount in with your gross receipts. What about what you are receiving? If it is a business expense, you can take it as a business expense. If it is a personal expense, you may or may not be able to take it as a personal expense. Make sure though you have written records of your exchange so that you can show them to the IRS in case of an audit.
- “No one else I know puts in this kind of income.” Over the years, I have heard this said about a lot of things. Wanting something to be true doesn’t make it true because a friend of yours doesn’t do whatever it is correctly. Unfortunately if you listen to this kind of freelance fantasy and you get audited, you will have a very difficult time of it.
- “I don’t earn enough for the IRS to bother with me.” I wouldn’t count on this. Wishful thinking is simply that. As a freelancer, you are conducting a business and must keep accurate records. Your tax returns must include your income and expenses correctly whether you make a great deal of money or very little. While the individual IRS agent may be personally sympathetic to your situation if you had a difficult year, it is her or his job to apply the IRS rules.