Knowing what to do about taxes can be daunting when you leave a steady job to become a freelancer on Upwork. This guide to Upwork taxes will help you.
There are all sorts of questions you might have:
- How do you calculate your income tax when you don’t have regular money coming in?
- Can you claim workplace deductions for your home office?
- Must freelancers make tax payments during the year?
It feels like you’ve stepped into a whole new world, where the forms have unfamiliar names, and you don’t quite know where you stand.
Fortunately, the Upwork Taxes help section has a raft of advice explaining what your tax obligations might be.
A Quick Disclaimer
HomeWorkingClub is not qualified to provide official legal or tax advice. We’re neither accountants nor tax advisers. So, we strongly advise you to seek tax advice from an independent tax advisor.
Every freelancer’s circumstances are different, so you’ll likely need professional assistance to navigate the rules of your country’s internal revenue service.
That being said, in this article, we aim to help you sift your way through some of the regulations and requirements when you’re freelancing on Upwork.
Do Freelancers on Upwork Have to Pay Income Tax?
Unfortunately, yes!
If you earn money working with clients through Upwork, you’ll need to report this income on your tax return. However, most freelancers won’t receive any tax forms from their contracts on Upwork.
So it’s up to you to gather the Upwork income and service fees reports and other information you need to calculate your income taxes and possible refunds.
The rules are different in each country, of course. So, since Upwork is based in the U.S., let’s start there.
Upwork Taxes in the USA
The IRS has this to say about freelancers and tax in the gig economy:
“The gig economy allows people to earn income by using technology to arrange transactions. This could include performing rideshare services or deliveries, renting out property, selling goods online, or providing freelance work. Often, customers and providers of goods or services are brought together through a digital platform on an app or website.”
All income must be reported, including income from:
- Part-time work, temporary work, or side work
- Anything not declared on a Form 1099-K, 1099-NEC, 1099-MISC, W-2, or other information return
- Any work paid for in the form of cash, property, goods, or virtual currency
Additionally, the IRS states that “taxpayers may also be required to make quarterly estimated income tax payments and pay self-employment tax.”
Reporting on Form 1099-NEC
It used to be that freelancers reported their tax on Form 1099-MISC, so you may still read advice about that form in pre-2020 articles. However, starting in the 2020 tax year, U.S. freelancers should report their income on Form 1099-NEC.
NEC stands for non-employee compensation, and it covers freelancers, consultants, independent contractors etc.
When you fill out the form, you’ll need a record of your total gross income on Upwork. Look for that in the reports section of your Upwork profile.
In most cases, your clients aren’t required to send you any forms or deduct taxes for you. So, unless you’re designated an employee or have earned more than $20,000 over 200 transactions through Upwork, you’ll need to get a 1099-NEC.
Are There Any Exceptions?
- If your client has employed you through Upwork Payroll, you’re classified as an employee rather than an independent contractor. When you use the Upwork Payroll service, Upwork’s staffing provider will be the employer. They handle all of the withholding and payment of taxes and provide a Form W-2.
- Different rules apply when you live in the U.S. and earn over $20,000 with 200+ transactions on Upwork. Upwork will file a Form 1099-K form with the IRS for you, and you’ll get a copy in the mail by January 31st.
You’ll find more information on Form 1099-K here.
Sales Tax in the U.S.
In October 2021, some U.S. states began to require Upwork to collect sales tax on Membership, Connect and Service fees. So, you’ll see these extra taxes if you live in the District of Columbia, Hawaii, Maryland, New Mexico, South Carolina, South Dakota, Tennessee, and Washington. (State info is correct at the time of writing but may be subject to change.)
The amount of tax that Upwork has to charge varies from state to state, but the average is 7.1%
International Taxes
As we said, tax requirements vary from country to country.
Australia and India require Upwork to charge GST (Goods and Service Tax) on their services.
Belarus, Russia, Mexico and the E.U. have VAT (Value Added Tax) calculated according to the local rate of the freelancer’s country of residence.
Upwork charges VAT or GST on the digital services provided to freelancers in those countries (i.e. service fees, membership fees, and connect purchases.) They don’t charge VAT or GST on the services that freelancers and agencies provide their clients.
Form W-8BEN / W-8BEN-E
Freelancers who aren’t U.S. taxpayers need to submit a W-8BEN form to Upwork. Doing that confirms to Upwork that you’re not a U.S. citizen – nor are you living and working there.
A W-8BEN confirms your legal name and address. Upwork doesn’t withhold any taxes or use the form to report your income to anyone else when you submit it.
You’ve probably already dealt with this form because Upwork won’t release your earnings until they have it.
If you are set up in another country as a company – the form is the slightly different W-8BEN-E.
Do I Need to Pay Taxes on Upwork Income if I Don’t Live in the USA?
Yes!
Upwork doesn’t provide much guidance for those of us outside the U.S.
So, it’s vital that you talk to a tax advisor or your country’s tax department to find out what you owe and how often you need to pay.
It can be tempting not to declare freelance income, especially if you don’t make a lot. However, most countries levy hefty fines on tax evaders, so it’s best to stay on the right side of the law. It’s also the right thing to do.
The Good News – Can you Claim Some Tax Deductions?
In many countries, you may be able to claim some of your expenses back as tax deductions.
Some possibilities could include:
- Home office space — this usually means a designated, separate room in your house or garden.
- Internet and phone fees — or part fees if some are for personal use.
- Office supplies – paper, printer ink etc.
- Upwork fees (wouldn’t that be a welcome surprise!)
Again, you’ll need to consult a professional or your IRD to check the facts in your country.
We’re not making any guarantees, but it’s certainly wise to ensure that you’re not paying any more taxes than you must.
Getting Paid on Upwork: Choose the Cheapest Payment Options
Upwork offers several different ways for you to transfer funds off the platform once payment is approved.
All payment methods incur a fee, but some cost more than others.
These payments go directly into your bank account:
- Direct to U.S. Bank (ACH) – Free in the U.S.
- Direct to Local Bank – $0.99 per transfer, plus any fees charged by your bank
- U.S. Dollar Wire Transfer – $30 per transfer
- Instant Pay for U.S. Freelancers – $2.00 per transfer
You can also choose to have your funds transferred to a third party vendor, including:
- PayPal
- Payoneer
- M-Pesa (Kenya only)
Upwork charges a small transfer fee to these vendors, just as they do for bank transfers. However, you’ll then sometimes pay a fee to get the money out again.
So, unless you want to use the money directly from PayPal or Payoneer, you’ll save fees by having your funds transferred directly to a bank.
While Upwork doesn’t include Wise (formerly TransferWise) at this time, we recommend that freelancers investigate setting up a Wise account for working with non-Upwork clients. If you’re transferring a lot of money around each month, you could pay less in fees by using Wise.
Conclusion
Paying taxes and fees is a fact of life – and Upwork taxes are very much a thing.
You might be a freelance writer or editor. Perhaps you run a business from home or enjoy a portfolio career.
Whatever freelance work you do, it helps if you:
- Keep records of your work income and expenses throughout the year.
- Save invoices and receipts.
- Download reports from Upwork.
- Obtain the correct tax forms.
- Consult a professional tax advisor.
More on Upwork
We have a huge amount of information on Upwork freelancing on this site.
Check out:
- Our guide to gaining “Top Rated” status on Upwork.
- The ultimate Upwork review.
- How to delete your Upwork account.
Learning About Working on Upwork
Check out our Freelance Kickstarter course.
Lyn is the author of Culture Smart NZ (2022). A freelance writer and blogger from New Zealand, she specialises in content for lifestyle magazines, blogs, podcasts and virtual summits. You’ll find her blog on writing, farm life & talented New Zealanders at lynmcnamee.com
