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Tax Year 2025 Updates for Freelance Workers

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There are two inevitables in human existence and one of them is taxes. The good news is that in many cases, one can prepare and develop a strategy to minimize the impact of the tax burden. The ability to devise a good strategy requires current information and that is the topic today.

You’re probably aware of Federal legislation known as the One, Big, Beautiful Bill. You may not know that parts of OBBB have been revised and proposed changes to federal tax Form 1099-K were tabled and guidelines from previous years have been restored.  

Officially titled the Payment Card and Third Party Network Transactions form,1099-K reports payments received from income generated by self-employed workers and paid to them by Third Party Settlement Organizations such as PayPal, Square, Stripe 2, or Venmo. Revenue received from transactions from online marketplaces, including Airbnb and eBay and also revenue derived from billable hours earned at Freelance B2B services platforms such as Fiverr and Upwork also trigger a 1099-K.

It’s important that Freelance professionals remain updated on federal and state tax legislation so that you can anticipate and prepare for your tax liability. If you’re able to choose your payment method—maybe you’re thinking of offering digital payment options for client invoices?—you would be wise to first assess the impact of that change to your finances. Giving clients additional payment options is now considered a competitive advantage and an aspect of customer service. But when you’d like to initiate payment flexibility, first discuss the matter with a tax accountant and let the tax filing implications, and also other financial advice, guide your invoice payment options.

Internal Revenue Service Form 1099-NEC

What will not change is IRS Form 1099-NEC (non-employee compensation). The form will be sent to self-employed workers, including Freelance professionals, other independent contractors and side-hustle specialists, who’ve been paid $600 or more in a given year. Your earnings most likely will not trigger a 1099-NEC if you billed the client less than under $600 in a calendar year, but you are still responsible for reporting all income whether or not you were sent a 1099-NEC. As a self-employed Freelance consultant, you are required to report self-employment income if your net earnings were $400 or more.

Internal Revenue Service Form 1099-K

As noted above, IRS Form 1099-K reports payments that Freelancers and other sellers of B2B or B2C goods and services received through Third Party Settlement Organizations such as PayPal, Square, Stripe 2, or Venmo for sales transactions between buyers and sellers have returned to the $20,000 billables and 200 transactions thresholds. Upwork and Fiverr will send 1099-K to Freelance workers whose billables equal or exceed $600 in a year, as noted above. Be advised that the proposed $2,500 (for 2025 earnings) and $600 (for 2026 earnings) thresholds are no longer in effect for 2025 and 2026.

As with 1099-NEC (and W-2), 1099-K statements must be sent to you, by email or hard copy, no later than January 31, 2026. If your clients pay you directly by credit, debit, or gift card, you’ll get a 1099-K from your payment card processor no matter how many payments you received or the total dollar amount of those payments.

Keep in mind that your state may have a lower reporting threshold for TPSOs, which could result in you receiving a Form 1099-K, even if your total gross payments and transactions did not exceed the federal $20,000 annual reporting threshold. Some states have their own rules for 1099-K reporting and your state threshold could be lower than the federal limit. While the IRS requires payment platforms to issue a 1099-K only if you have at least $20,000 in payments and 200 transactions for 2025, several states have set their reporting threshold at $600, regardless of the number of transactions.

Qualified Business Income (QBI) deduction

If your business entity is structured as a pass-through, you could be eligible for a 20% tax deduction by way of the IRS Section 199A Qualified Business Income (QBI) deduction. If you are an owner of a pass-through business entity, including S-corporations, Limited Liability Companies (LLC), Partnerships, including Limited Partnerships (LP) and Sole Proprietorships, can claim the QBI benefit whether or not they itemize deductions or take the standard deduction.

The QBI deduction allows eligible taxpayers to deduct up to 20 % of their QBI, plus 20 % of qualified real estate investment trust (REIT) dividends (not to be confused with income generated from rental property). Income earned through a C-corporation or W-2 wages are not eligible for the QBI Section 199A deduction. Eligible taxpayers can claim the deduction for tax years January 1, 2018 through December 31, 2025.

So who can do this? If taxable income (before the QBI deduction) is at or below the threshold amount—and thresholds are different for every year from 2018 – 2025, with the 2025 upper threshold at $197, 300 for single filing status and $394, 600 for married joint filing status—you’ll have access to the full deduction BUT the amount paid by an S-corp or a partnership that is treated as reasonable annual compensation for the taxpayer will not be eligible. To determine if your business may qualify for the QBI, click here to see this older, but useful, IRS form. Most of all, reach out to your tax accountant ASAP and verify your status.

Retirement Plan contribution deferral increase

Have you made a contribution to your retirement this year? If not, you have until December 31, 2025 to slide under the wire and save for your future. These retirement contributions come right off your income, lowering your tax bill and boosting your retirement financial readiness.

The Solo 401(k)—also known as the self-employed 401(k), individual 401(k), personal 401(k) or, to use the IRS’s preferred term, the one-participant 401—is known for its high contribution limits that enable Freelance consultants who have no employees for whom you provide benefits, to save for retirement. That includes Freelancers and gig workers who are Sole Proprietors, or structure their business entity as an LLC, S-corporations, C-corporations, or Partnership. If you have no employees, step right up to launch your preferred version of a single-person retirement fund.

  • In 2025, the maximum contribution is $23,500 (wearing your entity’s employee hat), plus an additional 25% of compensation (wearing your entity’s employer hat). You can also contribute an additional $7,500 in catch-up contributions if you are age 50-59 or age 64 or older. Those between age 60 and 63 may contribute an additional $11,250 in catch-up contributions if the plan allows.
  • In 2026, the maximum you can contribute is $24,500 as the entity employee plus an additional 25% of compensation as the entity employer, with additional catch-up contribution opportunities if you are 50 years or older.

If you file tax form Schedule C as a Sole Proprietor and have a SIMPLE IRA retirement plan, you are also treated as both employer and employee when calculating and reporting your plan contributions. Report both your salary reducing employee contributions and your employer contributions (non-elective or matching) for yourself on Part II – line 15 of Form 1040 Schedule 1, according to IRS info. You must deposit your salary reduction contributions within 30 days after the end of the tax year. For most people, this means salary reduction contributions for a given year must be made by January 30 of the following year. For most individuals, the annual contribution limit for a SIMPLE IRA is $16,500 in 2025 and $17,000 for 2026. Those who are age 50 years and older can also make an extra $3,500 catch-up contribution in 2025 and $4,000 for 2026 if their plan allows it. 

Self‑Employment Tax & Deductions

You already know that Freelance workers must file IRS Form SE no later than April 15, 2026 and pay 15.3% total (12.4% Social Security + 2.9% Medicare) on the net amount of your self‑employment income—because you must fund your own Social Security and Medicare benefits. The good news is that you can deduct half of the self‑employment tax (the “employer equivalent”) from your adjusted gross income.

  1. Social Security Cap: On the first $176,100 of combined wages + self‑employment income in 2025.
  2. Additional Medicare Tax:
  • 0.9% extra if income exceeds:
  • $200K (single/Head of Household),
  • $250K (married filing jointly),
  • $125K (married filing separately).
 Quarterly Estimated Taxes & Penalties

Because Freelancers file 1099-NEC and there is no withholding of earned income, you know that filing quarterly tax forms is a must-do if you expect to owe $1000 in federal tax, including self-employment tax; estimated tax payment must be paid with the quarterly filing. To avoid penalties, pay either 90% of 2025 tax or 100% of your 2024 earnings tax (or 110% of 2024 adjusted gross income if your earnings exceeded $150,000. Quarterly filing deadlines are April 15 (the annual filing), June 15, October 15 and January 15 (because 4Q earnings are reported in the new year).

In closing, I have a gift for those of you who will be 65 years old, or older, in 2025? if so, You’ll receive an extra $2,000 standard deduction (single filers) or $1,600 (joint filers).

Thanks for reading,

Kim

Image: The Tax Collector’s Office (1620-1640) Pieter Brueghel the Younger, courtesy of University of Southern California Fisher Museum of Art, Los Angeles

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8 Year-End Checklist Tasks To Keep You Organized

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The sun is setting on 2024 and telling Freelancers and all business owners that it’s time to close out the waning year and prepare to welcome the New Year. To make sure that no important matter gets lost in the shuffle during what may be a rush to tie up loose ends, you may appreciate the practicality of a year-end checklist. The checklist is simply a to-do list that keeps you organized as you attend to the many tasks and responsibilities, business and personal, that arise at this time of year. Taxes and other financial responsibilities rank high on the checklist; identifying business (and personal) goals for the New Year run a close second. As you work your way through your checklist, you’ll discover a perhaps unexpected bonus—the checklist also provides an objective assessment of where your business stands as of December 31 and can indicate useful goals and benchmarks for 2025.

Before you become immersed in holiday preparations and celebrations, block out four to eight hours to devote to getting your entity’s house in order. That’s your strategy to eliminate holiday spoilers, like anxiety resulting from uncompleted responsibilities. Call on your discipline and power through the administrative tasks listed below, so you can truly enjoy dropping into parties and celebrating the season with friends, family and colleagues.

  1. Make business purchases. The end of the calendar year is your cue to buy equipment, services, or other necessities for your business on or before December 31, to add to your 2024 tax deductions and lower business taxable income. What expenditures are on your wish list and what does your budget allow? If you’ve had business goals on your mind (and I know that you have!), certain software-as-a-service subscriptions could be on your must-have list. Or maybe you’ve thought of updating business equipment, or items to make your workspace more favorable? Do you need to pay an insurance premium, or upgrade a policy? Maybe you can make an early payment and let the expense be recorded as an asset on your 2025 Balance Sheet. Think also about initiating professional services, for example, a business attorney, or even bringing in a Freelancer to help with projects such as bookkeeping or social media management? Now is a great time to make those purchases, which will result in lowering your taxable income.
  2. Send Form 1099 to your Freelance workers. First, verify that Freelance team members you’ve hired have completed IRS Form W9, so that you will be ready to send to those who provided services of $600 or more an IRS Form 1099NEC . Tax statements must arrive, by USPS or email, no later than January 31, 2025, as required by IRS regulations.
  3. Get your bookkeeping up to date and schedule tax appointments. Before the holidays dominate your focus, bring your books up to date. If you maintain the business financial records yourself, get busy now and review the year’s financial records, receipts and accounting so that documents are organized and closed out for the end of the year and ready for tax preparation time. If you’ll hire a bookkeeper or a tax accountant to handle business taxes, schedule an appointment today to ensure that you’ll 1.) get on the calendar of whom you want to see and 2.) improve your chances of getting an appointment date that’s good for you.
  4. Consider your business legal entity and tax election changes. As a business grows and evolves, it may be beneficial to change your business entity classification or change the tax category. In many cases, forming an LLC or corporation, both of which change the entity’s tax status, can be more complicated when the change occurs mid-year and is sure to complicate that year’s tax returns. Furthermore, changing your tax status (e.g., converting your entity to an S-Corp) is time-sensitive and must be completed before the May 15th due date in most cases. Year-end is a good time to assess whether or not your current business entity type and tax status election are the best choice for your business. Incidentally, making this decision is ample motivation to upgrade your professional services by bringing on a business attorney and/or business accountant (or a very savvy bookkeeper) because you’ll want the guidance of a certified professional such as a CPA, financial planner, or attorney and to help you plan any major changes to have them effective for the start of the new year.
  5. Add dates for taxes, registrations and important filings to your new calendar. What with quarterly taxes, business registration or certificate renewals and other important records filings required of a business, you absolutely want to be ready and not caught unawares by any due dates. Record in your new year calendar all important filing, payment and renewal dates so you can keep your business compliant and in legal operation without incurring costly penalties and fees.
    • Business license renewal
    • Estimated income tax payments
    • Sales tax return filings and payments
    • LLC tax payment
    • LLC Statement of Information filing
    • Business insurance premium payments
  6. Contribute to your self-employed retirement account Investing money in a self-employed retirement account, such as a solo 401k or SEP-IRA, is 100% tax-free and lets you save on three tax categories that would otherwise pay. Instead, money invested in your self-employed retirement account enables you to avoid the federal and state self-employment tax – and book significant savings! Self-employed professionals can contribute up to 25% of annual net earnings, up to $66,000, to a self-employed retirement account tax-free (for 2023). Make your payment on or before December 31to lower your 2024 taxable income.
  7. Cancel any unused memberships and subscriptions. Oh, the best of intentions! You may have signed up for subscriptions, memberships, or other services that renew monthly or annually, which may have been helpful at one point in your business but are no longer useful—or IRT, you found that can’t find a role for them. The end of the year is a great time to review automatic payments charged to your business checking account and verify what is worthwhile and is actively being used.
  8. Plan your goals for the New Year. What next big steps to promote business growth do you see? What might be the next strategies you’ll implement to create a sustainable, profitable business? The possibilities are exciting and yours to pursue, guided by a good plan. In the October 15 post, we explored how you might scale your operation—maybe the new year is when you take actionable steps to do that? To avoid feeling overwhelmed, consider dividing your goals into short-term and long-term projects, breaking your larger goals into smaller, actionable steps you will need to plan ahead. Consider also tasks that can possibly be outsourced by hiring a Freelance professional like yourself? Start your new year goal setting by examining the current state of your business and then think about where you would like to be at the end of next year. What actions appear to be needed to get to that point? Next, break those goals into smaller projects and create a plan of smaller goals for each month of next year. When you start the year with smaller, actionable goals that seem easier to reach, it will seem easier to consistently take those smaller steps that can add up to big changes over time. Setting micro goals in advance can motivate you to develop strategies and implement action items that drive achievement.

Happy Thanksgiving to my American readers! To everyone, thanks for reading.

Kim

Image: © ProHow

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Third Party Payments and 2022 Taxes

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The Internal Revenue Service announced in December that it will delay by one year implementation of a new policy that will tax funds you receive by way of third-party payment processors. All entities using third-party payers to transfer funds derived from business activity must, at the close of the calendar year, report said payments on the appropriate IRS Form 1099 and send the documents to recipients of the payments, who will then include the amount of funds reported as part of annual income. The annual taxation threshold has been lowered to $600 for all types of 1099 income.

This new IRS policy was originally scheduled to take effect in 2023 and impact 2022 income, however, many who regularly receive funds through Venmo, Apple Pay, Samsung Pay and other peer2peer digital wallets apparently only recently learned that payments received would not only be reported on Form 1099-K but, alarmingly, will be taxed in the same fashion as 1099-NEC income.

Furthermore, because a significant number of personal financial transactions are also conducted on peer2peer platforms, users are concerned about both an unexpected tax bill and its accuracy. Can your electronic payment processor be trusted to recognize the difference between side hustle income and monies you received from friends to reimburse you for laying down your credit card when you all went out for drinks one night? Will the promised line of demarcation between business and personal fund transactions be consistently respected? Inquiring minds want to know.

Before the rule change, peer2peer payment services reported recipient income on Form 1099-K only when payments reached $20,000 and the number of transactions reached 200. If those conditions were met, the1099-K was required to be submitted to the IRS along with the tax return. The new policy has lowered 1099-K taxable income to $600 per year, aligned with 1099-NEC and 1099-MISC reporting income requirements. The number of payment transactions made will be irrelevant.

You’ve figured out by now that the tax law change will significantly increase the number of folks who will face a higher tax bill. Another loophole closes for the little guy! Still, the IRS has decided that the peer2 peer payments tax rule scheduled to expire on December 31, 2022 will instead remain in place until December 31, 2023 and the new ruling will apply to 2023 income.

Regardless of when the new IRS reporting rule takes effect, Freelancers and small business owners are not liking it. There is resentment that the tax change is specifically intended to crack down on suspected tax evasion within this cohort and others who toil in the gig economy, saddling you with more paperwork and headaches. The population that will be most affected often cannot afford to hire a tax attorney to defend themselves against suspected IRS or payment processor inaccuracies.

Venmo, which was bought out by PayPal in 2012, has been trying to prepare its customers for tax changes that could affect them. The company has emphasized that payments not specifically designated as being for goods or services will not be included on the 1099-K and that the company will not list individual transactions.

FYI, Venmo customers will be wise to familiarize yourselves with the differences between its business and personal accounts. Business users may be better off quittng that service, to avoid the additional fees charged, and instead track business transactions manually from the “friends” setting.

Finally, there is an intriguing twist to the story and a possible loophole has been revealed. Payment processor Zelle insists that the new IRS rule doesn’t apply to its bank2bank payment service, since its network doesn’t hold funds. The company is run by Early Warning Services LLC, which is jointly owned by seven banks (Bank of America, Truist, PNC, US Bancorp, JPMorgan Chase, Wells Fargo and Capital One). In fact, Zelle is included on users’ bank dashboards.

While Zelle offers a service similar to Cash App, Google Pay, PayPal and other peer2peer digital payment platforms, it was built as clearXchange, a peer2peer payment service created by and for its member banks. Zelle is an electronic network that manages automated clearinghouse (ACH) transactions.

According to Wendy Walker, chair of the Information Reporting Subgroup of the IRS Advisory Council, “ACH networks are not subject to 1099-K reporting.” She went on to say, in an email, that payments sent through its network “are not subject to this law” and that small business banking customers choose Zelle “because it makes it easier to complete digital payments where they bank, enabling easier bookkeeping and accounting by having the banking data at one source.” Ms. Walker seemed to infer that bank customers see a benefit in having money in their bank accounts that is not held by third parties.

OK. Of course, Congress could extend the law to include Zelle and similar “by banks, for banks” platforms. Stay tuned for updates.

Thanks for reading,

Kim

Image: © The New Yorker June 13, 2022. The End of the Year, Liana Finck, illustrator