Remote work has transformed how and where people earn a living, offering flexibility and freedom for employees and employers alike.

While the shift to remote work doesn’t create substantial tax differences for traditional W-2 employees in Minnesota or other states, there are crucial considerations for freelancers, gig workers and contractors operating as 1099 workers.

The Tax Responsibilities of Freelancers, Gig Workers and Other 1099 Workers

Freelancers and gig workers, often categorized as self-employed or 1099 workers, face unique tax obligations compared to W-2 employees. Unlike traditional employees whose taxes are automatically withheld from paychecks, self-employed individuals must actively manage their tax payments throughout the year.

What You Need to Know About Self-Employment Taxes

If you’re a freelancer, gig worker or independent contractor, you’re responsible for covering your Social Security and Medicare taxes, which are typically split between an employer and an employee for W-2 workers.

This self-employment tax amounts to 15.3% of your net earnings:

• 12.4% for Social Security
• 2.9% for Medicare

In addition to self-employment taxes, you’ll also need to pay federal and state income taxes based on your total taxable income.

Quarterly Tax Payments

Self-employed workers must make quarterly estimated tax payments to the IRS and the Minnesota Department of Revenue. The deadlines for these payments are:

• April 15
• June 15
• September 15
• January 15 of the following year

Failing to make these payments on time can result in penalties and interest charges. A good rule of thumb is to set aside 25 to 30 percent of your earnings for taxes.

Tracking Business Expenses to Reduce the Risk of Deductions Being Challenged

Freelancers and gig workers can lower their taxable income by deducting legitimate business expenses. Accurate record-keeping is essential if you plan to itemize your expenses.

Common Deductible Expenses for Freelancers

• Home Office Expenses: If you use part of your home exclusively for business, you may deduct a portion of your rent, utilities and internet costs. The IRS allows either a simplified deduction (based on square footage) or an actual expense method.

• Supplies and Equipment: Computers, software, office supplies and tools used for work can be deducted.
  
  
• Travel and Mileage: If your work involves traveling to meet clients or perform tasks, you can deduct mileage and associated expenses like lodging and meals.
  
  
• Professional Services: Fees paid to accountants, tax preparers or legal professionals for business-related services are deductible.
  
  
• Marketing and Advertising: Expenses for promoting your business, such as website hosting, online ads or business cards, can be written off.

How to Track Expenses

• Keep Receipts: Save all receipts related to your work. There are many apps designed specifically for freelancers to help them track deductible expenses.

• Use a Separate Bank Account: Maintain a dedicated account for your freelance income and expenses to simplify tracking.

• Invest in Software: Accounting software like QuickBooks or Wave can streamline income and expense tracking, helping you stay organized and ready for tax season.

W-2 Workers vs. 1099 Workers

For traditional W-2 employees, the tax process is straightforward. Employers withhold Social Security, Medicare and income taxes from each paycheck and report earnings on a W-2 form. These workers typically don’t need to make additional quarterly payments or pay self-employment taxes unless they do gig work on the side.

In contrast, 1099 workers must handle their tax withholdings, including paying self-employment tax, making quarterly payments and diligently tracking their deductions to reduce taxable income.

Tax Preparation Tips for Freelancers and Gig Workers

Understand Your Tax Bracket

Knowing your tax bracket helps you estimate your total tax liability. This is particularly important when setting aside money for quarterly tax payments.

Plan for Retirement

Self-employed individuals don’t have access to employer-sponsored retirement plans, but options like a SEP IRA, Solo 401(k) or traditional IRA offer similar tax advantages.

Stay Educated on Tax Law Changes

Tax laws can change yearly. Stay informed about deductions, credits and regulations that may impact your filings.

Consult a Tax Professional

A tax professional experienced with freelancer tax filings can help identify all possible deductions, make recommendations for tracking expenses, help you complete accurate filings and reduce your risk of an audit.

Employer Responsibilities in a Remote Work Setup

Although the focus is often on workers, employers also have obligations when managing remote teams. For instance:

• Employers must issue the correct tax forms (W-2 or 1099) based on the worker’s classification.
  
  
• They must comply with state tax regulations if their remote workers operate in different states, potentially requiring state-specific tax filings.
  
  
• Misclassifying employees as independent contractors to reduce their tax burden or labor costs can lead to penalties.

How to Avoid Tax Problems as a Freelancer or Employer

For freelancers:

• Keep meticulous records of all income and expenses.
• Set aside funds regularly for taxes.
• File taxes on time and ensure they are accurate. Overpaying estimated taxes is
• preferable to underpaying. If you do overpay, you will have those funds refunded back to you.

For employers:

• Classify workers correctly to avoid penalties.
• Stay compliant with state tax laws where remote workers are located.

Our Referral Counselors Can Connect You With a Minnesota Tax Lawyer

Navigating the tax implications of remote work can be overwhelming, especially for freelancers, gig workers and employers. Whether you need assistance with tax planning, compliance or resolving disputes, a Minnesota tax attorney can provide expert guidance tailored to your situation. Call us at (612) 752-6699 or fill out the form on our website to get referred to a vetted and qualified local attorney.