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I am super confused about taxes and freelancing. I tried to do some research but just got more confused.

First off, I use sites like Elance, oDesk, and working through email. I have a PayPal account. I don't charge much per given project (I am a graphic designer). On average I probably make only $350 - 400 a month.

How do I go about reporting these small jobs to the IRS, or do I even have to report my income if I use Elance?

If I do have to report them, how much will I have to pay back, and how much should I save?

  • Jacob, your home page link in your profile is broken. Oh, taxes is such a stressful topic. – juanpastas Mar 1 '15 at 3:03
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You are supposed to report all income earned from all sources.

Your tax liability will depend on many other factors. I am not a lawyer or an accountant. It will be best to discuss with a tax professional about this.

It would probably be best to set up a sole proprietorship company (again, talk to a tax professional, accountant or lawyer about how to do this, and if it's the right thing to do). Your company is how you channel the payments, and then you have tax advantages of owning a business - in other words, you can write off expenses against your freelancing income to minimize your tax liability.

EDIT based on the edit of the OP. How you report the income will depend on what tax form you file. If you are filing a Schedule C (Sole proprietorship), for example, there is a line for gross earnings and you don't have to specify the source(s) of the income, just the total amount. I believe the 1040 form also has a line for "other income" and you may have to add an additional sheet to enter all the sources.

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Since you say IRS I assume you're in the US. YES, by law you are supposed to claim all income. I think there will be an "other income" are somewhere on your tax forms when you are supposed to put it.

If the amount is under $600 for the year from any one client, that client is not required to do a 1099 tax form for you so the IRS does not get sent notification that they paid you. So if you do not claim the income they many never know, but it is the law that you claim it.

In this day and age with technology I assume it won't be long until the IRS is tapped into things like PayPal and aware of these transactions regardless of the 1099's, if not already in some cases.

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I am assuming from your question that you have not filed any entity formation documents so you are automatically a Sole Proprietorship. This income should be reported on schedule C this year for federal taxes, along with any expenses that you might have incurred when earning this income.

As for the taxation of that income you have a few options. If you also have W-2 income, you can have more withhold, or you can pay quarterly estimated payment. The easiest way to do this is your net income for the quarter times your tax rate. Or just wait till the end of the year and pay up, the downside is you are going to owe some interest and penalties if you are under paid.

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I am also not a lawyer nor accountant, but it's my understanding that if income from a single source is under $500, it doesn't need to be reported. But that's not to say you should report nothing if ALL your tickets for the year are under $500 but all from different clients, I think you have an opportunity to report it still somewhere in the process. FWIW.

[UPDATE] I was wrong. The IRS website calls it a "common misconception". It says all side income no matter how small is taxable. reference : http://www.irs.gov/uac/Reporting-Miscellaneous-Income

  • Do you have any source to support the <$500 rule you mentioned? – user152 Feb 13 '15 at 5:04
  • It's my understanding that you don't have to file a 1099 for a vendor/contractor you hired and paid less than $600. You also don't have to file taxes if your total gross income was less than a threshold (like $2000) - but that may also depend on your status as a dependant on someone else's return. The OP is earning between $3600 and $4800 through Paypal, which is above the filing threshold. – Voxwoman Feb 13 '15 at 14:04
  • comment on your update: It may be "side income" or "main income" - the way to reduce tax liability is to start a "side business" so you can deduct business expenses. There are rules about how many years you can operate a part-time business at a loss before the IRS considers it a hobby, however (generally 5 years). – Voxwoman Feb 13 '15 at 14:10
  • In the US Absolutely by law you are supposed to CLAIM all income no matter how small. If the amount is under $600 the company paying you does not have to issue a 1099. All that means is that the IRS won't know you were paid. That doesn't mean you aren't supposed to pay taxes on that money. – Emily Feb 26 '15 at 2:39

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