While freelancers enjoy a number of unique benefits in comparison to regular full-time employees, navigating the complex worlds of taxation and insurance can be somewhat challenging, particularly for freelancers that work and reside in the United States. This is the case because the companies that are seeking to find local freelancers and hire them typically leave the responsibility for these important topics with the freelancers themselves. This is in contrast to the situation for full-time employees where these matters are usually handled by their employer.

Taxes

The first important thing to note is that the Internal Revenue Service (IRS) views freelancers as self-employed independent contractors. Therefore, filing and paying taxes as a freelancer in the United States can be similar to the process that is followed by small business owners. Moreover, it may make sense for some freelancers to take the additional step of forming their own LLC or Delaware C corporation if they work full-time and/or receive substantial amounts of annual compensation. Although going through the incorporation process may be tedious, it can definitely offer significant tax advantages for some freelancers.

While regular full-time employees pay income tax on the basis of W-2 forms, most freelancers instead receive 1099-MISC forms from each of their clients at the end of the calendar year. Once a freelancer has collected all of their 1099 forms, they would then need to add up the dollar amount from each 1099 form in order to calculate their total freelance income for a given year. This is the case provided that accounting is done appropriately and assuming that both the company and the freelancer are located within the United States. In the instance where one or more of the client companies with which a freelancer has worked fails to provide 1099 forms, regardless of reason, the freelancer is still required to report all income that they received to the IRS.

Another important factor for freelancers to consider is the fact that some companies that are seeking to find freelancers compensate their workers on an hourly basis, while others pay their freelancers only at the conclusion of a project. If a local freelancer is paid on an hourly basis, they would need to keep track of how many hours they have worked in order to be able to calculate the amount in taxes that they will owe at the end of the year. On the other hand, if a freelancer is paid on a project-by-project basis, they would simply need to keep track of all of the amounts that they receive from freelancing work in a given year.

Seeing as clients can quite frequently fail to provide 1099 forms and as inaccuracies are possible, it is best practice for any local freelancer to keep track of their income themselves. The reason for this is because the companies that find freelancers and employ them are not technically legally required to provide these forms, with each freelancer instead being responsible for reporting their own income. For example, a freelancer could use a free tool called Mint in order to keep track of all incoming funds to their accounts. Alternatively, some freelance platforms such as SkillSoniq, assist local freelancers and companies with keeping track of hours and amounts earned and even take care of the management of applicable documentation including 1099 forms.

In terms of how much tax an American-based local freelancer can expect to pay, this is based on the amount of total income received in a given year, just as for any other individual. However, local freelancers in the United States are also mandated to pay a self-employment tax which, as of 2019, constitutes 15.3% of a freelancer’s annual income. This amount is primarily levied towards supporting the Medicare program in addition to other social security programs and is roughly equivalent to the amounts withheld on the paychecks of regular, full-time employees. Seeing as freelancers do not have those amounts withheld for them, they are obligated to pay these taxes during the tax season instead.

The minimum amount that is taxable for local freelancers based in the United States is just $400. In other words, if a freelancer makes that amount or greater in any given year, they are responsible to pay taxes on those earnings. As a general rule of thumb, most people recommend that local freelancers set aside about 30% of each freelance paycheck for taxes.

Budgeting for taxes on W2 vs. 1099

Seeing as the total amount that a freelancer may need to pay for an entire year of freelance income may be quite significant, it could be a good idea to split up tax payments into quarterly installments. The IRS offers this option and local freelancers who opt to use it effectively pay taxes four times a year instead of just once – in July, October, and in January, in addition to the standard tax date in April. Choosing this option can effectively reduce the amount that one needs to pay in April and can make taking care of one’s taxes much more manageable.

Another important thing to remember is that freelancers can effectively and significantly reduce their tax burdens through writing off expenses related to their freelance work. Generally speaking, there are a great deal of different types of expenses that may be tax-deductible including internet utility bills, client meals, transportation and travel expenses, computer and electronics equipment, marketing and advertising expenses, the cost of any necessary tools, services, and rental expenses (especially if the freelancer works from a home office), amidst many others. The best way for a local freelancer to determine exactly what deductions and tax breaks may be available to them is to consult with a tax professional. Additionally, just as it is important to keep track of all income, it is also very helpful to keep track of one’s expenses and any relevant receipts throughout the year. By doing this, a freelancer can make it far easier to determine just how much they may be able to deduct from their annual tax obligation.

One of the ways that a freelancer can keep track of their personal and business finances is by opening a business bank account in addition to the personal bank accounts that they may already have. There are a variety of financial institutions that one can choose from in order to achieve this and doing so can make it easier for freelancers to keep track of their professional expenses. In addition, maintaining a separate business bank account can also simplify the process of filing taxes by allowing freelancers to easily keep track of their monthly freelance revenues and expenditures. Moreover, business bank accounts can also empower freelancers by providing them with more flexibility in terms of the payment methods that they can accept. It is also worth considering that personal bank accounts are often limited in terms of the number of transactions that can be made in a given month as well as maximum transfer amounts. Finally, by using a business bank account instead of a personal bank account, a freelancer can use various business banking software in order to further simplify their financial tasks including tools such as Xero.

Depending on the total amount of income that a freelancer earns, it may make sense to hire a professional tax accountant to ensure that all tax matters are handled correctly. There are tax accountants that specialize in working specifically with self-employed individuals and these professionals may well be aware of special methods and tactics that can help freelancers save money during the annual tax season. For example, a well-reviewed New York-based tax accounting firm that specializes in working with freelancers is a company called Medows CPA. Another potential option is to hire local freelancers that specialize in professionally assisting self-employed individuals with their taxes.

Insurance

Although most companies offer insurance coverage of varying scopes to their full-time employees, companies that hire local freelancers do not typically extend these benefits to their freelancers. As such, it is necessary for any local freelancer to ensure that they take care of their insurance coverage needs, including healthcare plans.

While there are a variety of insurance plans that are available to individuals, varying from travel to baggage to credit card balance insurance, the most important kind of insurance for most local freelancers is healthcare coverage. Depending on one’s needs as well as the extent of healthcare insurance that one desires, one can apply for healthcare insurance of varying scopes of coverage. The significant thing is that one needs to choose between affordability and the extent of coverage when choosing the healthcare insurance plan that is right for them.

1. Health Insurance

Health insurance plans can be fairly complicated, but an important first step for a freelancer looking for health insurance coverage is to check whether they may be eligible for free or subsidized plans such as Medicare, Medicaid, Veterans Health Administration, Children’s Health Insurance Program, and Premium Tax Credits. These types of plans are highly advantageous for those individuals who qualify for them as they can be extremely affordable.

If, however, an individual does not qualify for any government-subsidized plan, they would then need to consider the amount of deductible that they are comfortable with. In simple terms, the premium of an insurance plan is what monthly amount the insurance plan costs. The copay amount is how much an individual needs to pay out-of-pocket for medical expenses, up to a maximum out-of-pocket amount. Finally, the deductible is the amount that an individual is required to pay towards their medical expenses prior to the activation of the insurer’s contributions. The general rule of thumb is that the higher the monthly premium, the lower the deductible amount. Therefore, the decision for an individual is whether they would prefer to pay a higher premium in order to receive lower deductibles or whether it makes more sense to pay lower premiums but with higher deductible amounts.

Another important factor to consider when comparing different health insurance plans is each plan’s Prescription Drug List. This list specifies the costs for different tiers of medications and plans can also vary in terms of whether they cover brand-name or only generic pharmaceuticals. Importantly, not all medications are covered by all plans and therefore it is key to verify whether a given health insurance plan covers the medications that one is already taking.

In addition, healthcare insurance plans vary based on the network of healthcare providers that are included as part of the coverage. Some plans do not cover any expenses that may be incurred outside of that plan’s network while others may cover them only partially or at higher rates.

Finally, there are also usually a list of exclusions of treatments and procedures that are not covered by a given healthcare plan. These lists of exceptions can be quite extensive but generally include cosmetic procedures, alternative treatments, as well as dental and vision services. Therefore, this implies that additional insurance may be needed, dependent on the individual’s needs.

2. Dental Insurance

Similarly, to how there are a variety of healthcare insurance networks in the United States, there are also a number of different dental networks as well. Signing up for a dental insurance plan with a given insurance provider allows the individual access to dental professionals and offices that are part of that network. Seeing as dental professionals that are outside of that network are not covered in some dental insurance plans, this means that one ought to carefully verify that their selected dental insurance plan gives them access to local professionals.

Generally speaking, most dental insurance plans provide individuals with free cleanings and x-rays, and discounted rates on other dental services such as fillings and root canals. There are also typically waiting periods between cleanings, fillings, and other major work. In addition, just as with health insurance, deductible amounts can vary and there may also be maximum benefit amounts that are specified on an annual basis.

3. Vision Insurance

Just as healthcare insurance does not cover dental procedures, standard healthcare insurance also does not cover vision-related procedures and equipment. Therefore, it may make sense for some individuals to also sign up for a vision insurance plan.

Vision insurance can help individuals pay for things like eye exams, eyeglass frames and lenses, contact lenses, and in some cases, even provide discounts on corrective procedures such as LASIK. While vision insurance is not necessarily a requirement for everybody, if you are a freelancer who wears contact lenses or eyeglasses, vision insurance may well be a worthwhile investment.
Typically, vision insurance is significantly cheaper than either health or dental insurance, and the total cost of such plans is generally less than $200 a year. In some instances, it may also be possible to supplement existing health or dental insurance plans with vision insurance add-ons.

4. Life Insurance

Another important type of insurance is life insurance. Life insurance premiums range significantly dependent on one’s age and gender, whether one has any pre-existing medical conditions, and the coverage amount that one desires. Moreover, an individual can also choose between life insurance plans that span a given period of time – deemed term insurance – and those that are for-life – sometimes called universal life or whole-life insurance.

Choosing life insurance may be a somewhat complex decision because one needs to determine the ultimate goal of purchasing it, the amount that one would like to cover, and how the benefits should be used. In addition, different life insurance plans may provide coverage for different periods of time, some may provide access to partial cash values, and can provide differing levels of tax advantages. In addition, there are a variety of fees and charges that may apply which vary from provider to provider.

5. Disability Insurance

Disability insurance, also referred to as Long-Term Disability Insurance (LDI) refers to a type of insurance that is designed to provide an individual with a source of income if they are no longer able to work for an extended period of time due to illness or injury. Disability insurance is particularly vital for freelancers seeing as they lack the ability to take sick leave.
When one is looking to purchase disability insurance, a general rule-of-thumb is to buy insurance that covers about 50% of monthly income. Disability insurance benefits are calculated on the basis of historical annual income less any applicable deductions.

There are also two types of disability insurance, one of which comes into effect after 30 days with the other coming into effect after 90 days. As one can guess, the latter option is generally less expensive than the former. In addition, the cost of disability insurance also depends on the age and the monthly benefit amount and the cost can vary significantly. In order to qualify for a certain amount of monthly benefits, an individual will need to demonstrate that they had made the corresponding minimal annual salary the prior year. For instance, in order to receive a monthly benefit of $3,000, one would need to have made an annual income of at least $72,000 the previous year.

6. Accident Insurance

Similarly, to disability insurance, accident insurance is designed to cover the expenses that are not covered by regular health insurance. In other words, accident insurance can be used to cover medical expenses such as copays and deductible amounts but may also be used for any other life expenses that may be accrued following an accident.
In other words, whereas medical insurance can help cover the medical costs associated with recovering from the accident itself, accident insurance is used to help pay for any other expenses that are not covered by health insurance. Accident insurance provides certain flat amounts for various events that may occur such as hospital visits, bone fractures, or mandatory medical surgeries and covers accidents regardless of where they may occur. Therefore, accident insurance will take into effect regardless of whether an accident occurs at home, on the street, or at work. The amount that one can expect to receive following an accident leading to an injury depends largely on the severity of the incident and can range from a few hundred to thousands of dollars.
In short, accident insurance serves to supplement a basic health insurance plan in order to assist an individual in their recovery from an injury.

7. Critical Illness

Just as accident insurance is designed to help individuals after they have suffered an accident, critical illness insurance is used to assist individuals who succumb to specific major medical ailments including cancer, heart attacks, and strokes. Illness insurance is also offered as a supplement to regular medical insurance.
The way that it works is if an individual succumbs to a serious disease specified under the plan, they may be entitled to receive a lump sum payment ranging from a few thousand to tens of thousands of dollars. These payments can be used in any way that the insured person wishes and also can help cover health screenings and diagnostic tests. Some critical illness insurance plans also include additional benefits to help cover the cost of cancer vaccines, for example.

8. Other Insurance Plans

In addition to the aforementioned insurance plans, there are also a variety of other types of insurance coverage that an individual may wish to purchase, dependent on their circumstances. These other types of insurance include various types of home, vehicle, pet, identity, and travel insurance. Some types of insurance plans can be combined into bundles and still others may be included as benefits with other financial products. For example, many credit cards include basic travel and identity insurance. Generally speaking, finding a balance between getting as much protection as possible and the total cost of the coverage is important, with the exact extent of coverage dependent on the individual’s preferences.

Accessing Insurance Coverage

Clearly, there are a variety of options that are available for freelancers that are seeking to protect themselves and their families from life’s potential calamities. While full-time workers may expect their employers to provide some assistance with providing insurance coverage, companies that hire local freelancers generally do not extend these benefits to their freelance employees.

With that said, however, some individuals who had previously worked for an employer that provided them with insurance may have the option to convert their existing group healthcare plan into an individual plan. This option may be more expensive than others but also can provide very extensive coverage for those individuals that would prefer that choice.

Another option is an emerging alternative called “portable insurance.” The primary difference between traditional and portable insurance is that whereas traditional insurance benefits are tied to a certain employer and therefore become inactive when an individual stops working with that employer, portable insurance allows coverage to not be tied to any specific employer or job. In other words, even if an individual no longer works with a given company, they can continue to enjoy insurance benefits.

Currently, there are a variety of insurance providers that offer this type of insurance in the United States.

1. Nationwide’s Portable Insurance

Description: Some established insurance companies allow individuals to purchase portable insurance, including Nationwide. Nationwide recommends that freelancers who are seeking to buy portable insurance consult with a Nationwide insurance professional in order to begin the process.

Available In: All 50 states, DC, and Puerto Rico.

2. Trupo / Freelancers Union

Description: Trupo is a newer insurance provider that is partially owned by Freelancers Union. The Freelancers Union is a non-profit organization which is focused on advocating for freelancers and providing them with the services that they need. Through Trupo, freelancers gain the ability to directly buy into insurance plans.

Available In: California, Connecticut, Florida, Georgia, New Jersey, New York, Pennsylvania, and Texas.

3. Hiscox

Description: Hiscox is an insurance provider that is partnered with the Freelancers Union and provides insurance in a few states where Freelancers Union does not directly operate.

Available In: All states except Alaska.

4. Catch

Description: Catch allows freelancers to search and compare available health insurance plans and also assists them with saving for retirement through multiple IRA plans.

Available In: All states, but available coverage may vary from state-to-state.

5. Oscar

Description: Designed as a low-cost alternative to the major insurance providers, Oscar maybe a good option for some individuals seeking less comprehensive medical coverage at a lower cost.

Available In: Arizona, California, Florida, Michigan, New Jersey, New York, Ohio, Tennessee, and Texas.

Moreover, some freelancing platforms, including SkillSoniq, even assist freelancers in this process. SkillSoniq is a company that helps connect organizations seeking to find local freelancers with the best freelance talent. Through its partnership with Trupo, SkillSoniq helps the freelancers that use their platform access insurance benefits. By using Trupo, local freelancers on the SkillSoniq platform gain the ability to purchase a variety of insurance plans, including dental, vision, life, illness, and accident insurance. In addition, per SkillSoniq’s trial-to-hire model, freelancers using the platform can purchase affordable plans while they are employed as local freelancers, and then can easily transition to company-provided insurance plans when they get hired as full-time employees by the companies that sought to find local freelancers on the platform. You can learn more about SkillSoniq and get started here.

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