Freelancing Tax Questions

[Mai Yang]

Hi! I have been freelancing for the past 8 months with just one client for this year 2023 ( I don't have any other clients currently, but I do plan to get more clients next year). The thing is I'm not freelancing through a website, like Fivrr or Upwork. I did a 3 month apprenticeship with my current client through a program. After my apprenticeship ended, she hired me, but not through that program. And she basically told me that what I'm doing is "under the table" work, because I'm a freelance Social Media Manger and I'm still debating if I should register my social media business as a "legal" business in my state of Minnesota. Since she believed that I'm working "under the table", that is the reason why she can't put on her business taxes that she's paying me for marketing her business. I'm not sure about this, so I wanted to get a tax expert opinion on this.

Am I consider working "under the table" just because I'm not registered as a "legal" business? Is it wrong/illegal for her to put on her business taxes that she's paying me? And should I register my social media business? 

Thank you for reading!! Let me know if you need any clarifications! 

[cucpa1991 · Accepted solution]

Mai Yang,

You have brought up some employment issues as well as tax issues.  I am glad you ask the questions now instead of when you are completing your tax return and are caught off guard by a balance due on your returns.

In your case, the first thing to consider is are you her employee?  If you are her employee the money you are paid is required to be reported as W-2 income and the proper taxes must be paid and reported by (her) the employer.

If you are not an employee then she will need to report the amounts she pays to you on a Form 1099-NEC.

In this case, you will pay your own taxes through Quarterly Estimated Tax deposits.  

If you take a look at this list, I think you will quickly understand which type of relationship you have:  https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-o....  The IRS states these factors:  

Facts that provide evidence of the degree of control and independence fall into three categories:

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

The keys are to look at the entire relationship and consider the extent of the right to direct and control the worker. Finally, document each of the factors used in coming up with the determination.

The IRS has established procedures for reporting income in both cases.  The "under the table" method is not one to be used as it indicates that she is willingly attempting to avoid taxation from Federal and State regulations.    Furthermore, if a business classifies an employee as an independent contractor and have no reasonable basis for doing so, then the business may be held liable for employment taxes for that worker.   

In addition, I would register my business and follow the State and local licensing requirement of your area.  Don't compound your issues if you are truly self-employed.

Let us know if we can provide additional insight.  Have an awesome day!