Loading the player...

What is a 'Freelancer'

A freelancer is an individual who earns money on a per-job or per-task basis, usually for short-term work. A freelancer is not an employee of a firm, and may therefore be at liberty to complete different jobs concurrently by various individuals or firms, unless contractually specified to work exclusively until a particular project is completed.

Typically, freelancers are considered independent workers and may do such contract work full-time or as a side job to supplement some other full-time employment, time permitting. Freelancers, as independent contractors, typically require signed contracts for the job to be done and will agree to a pre-determined fee based on the time and effort required to complete the task. This fee may be a flat fee or a per-hour, per-day, per-project fee, or some other similar measure.

BREAKING DOWN 'Freelancer'

A freelancer tends to work in the creative, skilled or service sector such as in: film, art, design, editing, copywriting, proofreading, media, marketing, music, acting, journalism, video editing and production, illustration, tourism, consulting, web site development, computer programming, event planning, photography, language translation, tutoring, catering, and many more. An example of a freelancer would be an independent journalist who reports on stories "at large" and then sells his or her story to the highest bidder. Another example is a web designer or app developer who does one-time work for a client and then moves on to another client.

The Internal Revenue Service (IRS) categorizes freelancers as self-employed. A self-employed worker, unlike an employee of a company, does not have his taxes withheld by the company s/he is doing business with. Paying income taxes is therefore, the sole responsibility of a freelancer. In addition to the income tax, a freelancer is also subjected to the self-employment tax mandated by the IRS. The self-employment tax applies to a freelancer who earned $400 or more in any given tax year. The self-employment tax has two components, namely Social Security and Medicare tax.

Since the IRS considers freelancers to be business owners, freelancers have to pay self-employment tax as both an employer and employee. For example, Social Security tax is assessed at a rate of 6.2% for an employer and 6.2% for the employee. An independent worker such as a freelancer would be taxed 6.2% + 6.2% = 12.4%, as s/he is considered to be both an employer and an employee. The Social Security tax is only applied to the first $127,200 income earned. The Medicare tax rate, which is 1.45% for both entities, is 2.9% for the self-employed worker. Total self-employment rate that a freelancer has to pay is therefore, 12.4% + 2.9% = 15.3% (as of 2017).

Freelancers may qualify for certain tax deductions that business owners can claim on their business expenses. According to the IRS, these expenses have to be ordinary and necessary for the operation of the business. This means that a freelancer would not be able to claim a deduction on an expense that s/he would normally make without the business. Some examples of deductions that can be claimed include home office deductions such as rent and utilities, costs of traveling to a job, costs of entertaining a client, costs of courses or certifications that directly relate to the business profession, etc.

In the U.S., freelancers do not receive W-2 forms for income tax purposes and instead will file a 1099 Misc. tax form which does not typically include any tax withholdings. A freelancer who provided services to multiple clients during a given tax year, will receive 1099 Misc forms from each of those clients.

Benefits of freelancing include freedom to work from home, flexibility of work schedule and a better work/life balance. Freelance work can benefit workers who have been laid off, reducing the incidence of overall unemployment in an economy.

Drawbacks include uncertainty about future income, job stability and consistency with getting new work. There is also a lack of typical employer benefits such as insurance and retirement plans, and typically lower per-hour rates compared to employed salary earners.

RELATED TERMS
  1. Sharing Economy

    The sharing economy is a peer-to-peer activity of acquiring, ...
  2. Social Security Tax

    The tax levied on both employers and employees to fund the Social ...
  3. Home Office Expense

    Home office expenses are expenses incurred by the operation of ...
  4. Tax Home

    A tax home is the city where a worker's primary place of business ...
  5. Earned Income

    Understanding what defines earned income is key for filing taxes ...
  6. Withholding

    The portion of an employee's wages that is not included in his ...
Related Articles
  1. Personal Finance

    Freelancer Or Employee: Identifying Your Next Career Move

    Although the increasing accessibility of independent contracting has created job opportunities, it is important to remember that this method of working also has considerable disadvantages in ...
  2. Personal Finance

    Today's Top Paying Freelance Jobs

    Which are the top paying freelance jobs in today's economy? And do they allow a person to actually make a living?
  3. Small Business

    5 Big Surprises When You Set Up A Freelance Business

    Smart tips to help you start a freelance business more easily.
  4. Personal Finance

    4 Ways to Make Extra Money to Fund Financial Goals

    Looking to increase your income? Consider these ideas to make it happen.
  5. Personal Finance

    America’s Labor Market: Hidden Distortions and Uncertain Forecasts

    Employment reports released by the Bureau of Labor Statistics have a profound impact on political, business, consumer, and investor behavior.
  6. Personal Finance

    20 Flexible Jobs with High Growth Potential for 2017

    A strong employment outlook for 2017 makes flexible jobs more appealing than others, especially for people who need wiggle room in their work schedules.
  7. Personal Finance

    Resume Roundup For Freelancers

    Radical resume advice for atypical careers: permanent freelancers and "slashers" with multiple talents, such as wedding musician/composer/house painter.
  8. Retirement

    How to Retire Abroad at 40 as a U.S. Freelancer

    Retiring abroad at 40 requires a complex calculation, from finding a lucrative freelance career to navigating residence and employment laws.
  9. Taxes

    Estimated Taxes Tripping Up More Filers

    If your working as an independent contractor, making sure you cover your bill for estimated taxes is important for avoiding a tax penalty.
RELATED FAQS
  1. Benefits of a Solo 401(k) for Self-Employed & Freelancers

    Learn what a solo 401 (k) plan can do for you. Find out what the benefits and pitfalls are for self-employed, independents, ... Read Answer >>
  2. How is Social Security tax calculated?

    Were you ever confused about your social security tax? Find out how it is calculated, including the impact of the Medicare ... Read Answer >>
Trading Center