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Hiring a Freelancer: The Tax implications for Recruiting Freelancers

Posted by Insightlink on 02/11/22

It is no secret that several businesses are using independent contractors or freelancers for their work. This trend is even more prevalent than before. One of the researches conducted in 2015 has indicated that more than 50 million Americans are doing some kind of freelancing work. Although this is great news for solo proprietors, there is one reminder for these employers, there are some tax implications involved in hiring freelancers. You need to prepare and plan for this with your tax advisor.

freelance employee tax rules

What constitutes a freelancer?

Classifying the freelancers properly can be a difficult and confusing task for several employers especially when they are using freelancers for the first time. If your organization hires a person to work for them as a freelancer you must make sure that these people are indeed independent contractors and they are not employees. Employees that are misclassified as freelancers or independent contractors are a prime example of a tax target area used by the Department of Labor and IRS. It has become more of a target sector according to the health insurance mandate and Affordable Care Act. With the rise in popularity of freelancer hiring in almost all sectors including the healthcare and medical field employers are hiring them as medical statisticians, biotechnology consultants, clinical evaluation report writers, etc.

IRS assessment of freelancer vs employee status

One of the issues while deciding if a worker is an independent contractor/freelancer or an employee is that there are no definite answers available. The guidelines offered on state and federal levels are different. Earlier the IRS utilized a 20 common law factors test to try and simplify this issue down to 3 major categories for deciding whether a freelancer is classified properly. These three major categories are financial control, behavioral control, and the relationship between the involved parties. Every situation is evaluated on a case-to-case basis.

Classification of your staff: Freelancer vs. employee

Here is a breakdown to help the employers comprehend the difference between independent contractors and employees. Although it is tempting to classify your employees as freelancers due to the cost-saving involved, you should not. Keep in mind that there are strict rules around the correct classification of workers and there are steep penalties applicable for a failure in the incorrect application of the law. Some of the companies incorrectly classify around 50% of their employees as independent contractors and around 30% of the businesses misclassify these contractors as employees. If your answer to these questions is yes you are hiring an employee and not a freelancer.
Is the person working just for you?
Is the work going to be performed on company premises?
Are you going to provide training and tools for these employees?
Are you in control of the number of hours this individual is going to work?
In the case of employees, you are required to withhold taxes, pay the payroll taxes, and you are required to file forms W-2 and W-3. These forms are utilized for reporting wages and they are filed with ESSA or Employee and Social Security Administration.

Risks involved in misclassification

Incorrect classification of a person about who should be a freelancer and who must be an employee can have disastrous results. It may result in you owing penalties, taxes, worker compensation, and interests. In the case of hiring freelancers, various businesses do not have to face the risks involved in being caught with a chance audit. A freelancer may apply for unemployment benefits or get hurt on the job which could lead to authorities investigating the person. It is a good idea to pay a worker properly right from the beginning. It also allows you to negotiate how much you are paying the worker with or without workers' compensation, payroll taxes, and other benefits.


In the case of independent contractors or freelancers such as accountants or attorneys, there is no need for any withholding of payment. However, you are required to provide the IRS and the freelancer with form 1099-miscellaneous. However, this form is only required when you are making payments in the excess of $600 or more for the services rendered. You can use electronic services available for this such as a 1099 e-file from Intuit to pre-fill the info. You can print or email the forms to the contractors.
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