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isaac-tait
Community Member

Freelancing within freelance in the USA market

I am curious about any legal issues regarding reporting pay to the IRS if I were to take on a client job and sub-contract out pieces of the work necessary to complete the job.

 

For example, if I took on a web development job and the client wanted a SQL database setup but I did not have experience with that and therefore subcontracted out that portion of the job to another freelancer. After the job was completed and I received my pay through Upwork and then paid the freelancer I brought on to assist for their time. How would this affect me (if at all) at the end of the year regarding income reporting to the IRS?

 

My question is rooted in the assumption that Upwork reports to the IRS my total pay every year. However, as a freelancer, I am responsible to file and pay any necessary taxes at the end of the fiscal year on any money I made. Is this a correct assumption?

 

To make the math easy let us say I take home $50 an hour (after Upwork takes their cut) and bill 1,000 hours in 2021. My take-home would be $50,000.00. However, let us say I paid out 40% of that take home to sub-contractors. So in reality, I took home $30,000.00 which I would report to the IRS and pay taxes on. However, Upwork would have reported to the IRS that I made $50,000.00. So, the IRS would think that I was lying on my tax return and possibly audit me. I am obviously looking to avoid that but do not want to pay taxes on money I did not make.

 

Am I responsible to report to the IRS any wages paid to subcontractors that I hire to finish a job? Or does that fall on the subcontractor to be forthright and honest to the IRS in any pay that they received?

 

I hope my question makes sense. I want to be totally honest and upfront, which is why I am asking now before I move forward with taking some more complex jobs. Thank you in advance for any guidance offered.

ACCEPTED SOLUTION
wlyonsatl
Community Member

The IRS would expect you to pay federal income tax on the gross amount of pay you receive from Upwork minus the deductible expenses you have during the year, which would typically include all of Upwork's fees and the amounts you pay to subcontractors for their services in completing your Upwork projects.

 

I can't think of a reasonable circumstance where this would not be true, but, as Preston said, contact an accountant for the details on this (and all other) deductions you can take to reduce your taxable income. Your main concern would probably be keeping sufficient records of your payments should the IRS ask for proof of your deductions. Just check stubs or cancelled checks might be sufficient, but if your payments with a particular subcontractor reach a certain level you might be obliged to provide them and the IRS with an annual confirmation of the subscontractor's income from you.

 

Or buy a good book on accounting and taxes for small business.  

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3 REPLIES 3
prestonhunter
Community Member

You would need to speak to your accounts and tax advisors about this.

wlyonsatl
Community Member

The IRS would expect you to pay federal income tax on the gross amount of pay you receive from Upwork minus the deductible expenses you have during the year, which would typically include all of Upwork's fees and the amounts you pay to subcontractors for their services in completing your Upwork projects.

 

I can't think of a reasonable circumstance where this would not be true, but, as Preston said, contact an accountant for the details on this (and all other) deductions you can take to reduce your taxable income. Your main concern would probably be keeping sufficient records of your payments should the IRS ask for proof of your deductions. Just check stubs or cancelled checks might be sufficient, but if your payments with a particular subcontractor reach a certain level you might be obliged to provide them and the IRS with an annual confirmation of the subscontractor's income from you.

 

Or buy a good book on accounting and taxes for small business.  

Thank you very much Will L. I appreciate your insight.

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