The path we take in our careers can be a fairly winding one. It’s hard to predict exactly where you’re going to wind up. For instance, last year I found myself in the position where, while working as an independent sound designer after years as a staffer, I needed a team of people to help me complete a project by deadline. It’s not a bad position to be in. I like working, and having the ability (and, admittedly, necessity) to spread some of that work out amongst my peers felt good. There are two ways you can handle that on the billing side.
- Have those people bill your client directly.
- Bill your client once and and have your team invoice you for their work.
I chose the latter, and it presented an interesting situation when taxes rolled around. This article is to offer some of the key information I learned in the process. I’ll apologize to those people outside of the U.S., because this is going to be specific to the tax system here. There’s a tiny bit in here that might be useful to folks outside of this country I live in, but I won’t be offended if you skip this article.
Now for the disclaimer…
I am not an accountant. I am not a tax lawyer. Do not blindly follow my experience and information. I could have something wrong. Maybe you’re only discovering this article in 2016…in which case, it’s possible the tax codes have changed. I present this only so that you’ll be aware that there could be some things you need to investigate yourself. In the very least, it will give you some questions to bring to an accountant to make sure you’re preparing your taxes correctly. Which brings me to my first point.
Get an accountant.
No matter how small your business (and yes, a sole proprietorship or working as a freelancer counts), you should really have someone you can talk to suss out how your taxes are going to play out. In the very least, they can tell you what kind of deductions can legally be applied to your tax returns. That can give you a few ideas on how to effectively invest your money in gear, software, office supplies, etc. The main deduction we’re concerned with here, though, is if you’re hiring additional ears to help you get the work done.
If you’re subcontracting or hiring freelancers, do you want to claim that expense against your income/revenue for the year? Chances are the answer is yes. So where is the threshold for simple tax processing? [ed. at time of posting…]
If you pay an individual more than $600 in a single year, that income must be reported to the government.
What constitutes an individual? The term applies to a broader group than you might believe. For the purposes of our discussion here, it’s anyone who isn’t incorporated. Here’s the part that’s tricky: in this case, an LLC isn’t considered “incorporated.” So, it doesn’t matter if the help you hire is an individual with no personal/independent business license, a sole proprietor, or an LLC. If you pay that entity over $600, you’ve got some paperwork to file. I’ll stress this again, talk to your accountant to confirm. Please don’t just blindly assume I’m giving you all of the information. I can’t confirm that I am or not.
If you have to file paperwork, it’s going to be some flavor of form 1099.
If you pay the entity in cash (this includes by check, bank transfer, etc.), you must file form 1099-MISC. If you pay via credit card, you instead file form 1099-K.
These two forms have to be filled out by the employer (aka: you) and filed with the IRS. You’ll retain a portion for your records, and also deliver it to the individual. This information also has to be filed with the state. Some states have an arrangement where a portion of the form is forwarded on to them from the IRS. Some states require separate filings. Check to find out…ask your accountant.
In order to properly file these forms, you’re going to need a form from your freelancers/contractors.
If the individual in question is required to file tax returns in the U.S., you’ll need them to fill out a W9 form. This includes people in the U.S. on work visas or green cards.
If the individual is foreign based, and NOT REQUIRED to pay taxes in the U.S., you’ll need form W8 from them.
That’s the one bit for people outside of the U.S. One of the folks I hired was based in the U.K. Even my accountant had to do some research as to how to properly address that situation. In both cases, W9 or W8, you hold on to these forms for your records. If you get audited, you want to have these ready for the process. They’ll help keep you out of trouble.
I’m going to repeat it, the information I’ve presented here is to the best of my knowledge without going into conjecture. There are nuances to all of this that I am in no way qualified to even attempt discussing. If someone else can find the information gained in my experiences of this past year useful, fantastic. I still highly recommend that you avail yourself of the services of a tax professional (someone other than H&R Block or similar chain services). You probably wouldn’t want them cutting audio. Why not avoid trying to do their gig?