Internal Revenue Service (IRS)

Definition:
The Internal Revenue Service (IRS) is the U.S. federal agency responsible for administering and enforcing tax laws. It collects federal income taxes, issues tax refunds, and provides guidance for taxpayers and businesses. The IRS operates under the U.S. Department of the Treasury.

🔑 Key Responsibilities

• Tax collection: Collects individual and corporate income taxes, self-employment taxes, and other federal taxes.
• Tax enforcement: Ensures compliance through audits, penalties, and legal actions against tax evasion.
• Taxpayer support: Publishes tax forms, instructions, and guidance (e.g. IRS.gov).
• Refunds & credits: Processes refunds, tax credits (like the Child Tax Credit), and economic impact payments.

💼 What Freelancers Need to Know

• Self-employment taxes: Freelancers pay Social Security and Medicare taxes (currently 15.3%) in addition to income taxes.
• Quarterly estimated taxes: If you expect to owe more than $1,000 in taxes, you must pay estimated taxes four times a year using Form 1040‑ES.
• 1099 forms: Clients issue Form 1099‑NEC if they pay you $600 or more in a year.
• Business expenses: Deduct eligible costs (home office, equipment, software, travel) to lower taxable income.
• Online tools: Use the IRS Direct Pay service or EFTPS to pay taxes electronically.

⚠️ Common Pitfalls for Freelancers

• Failing to set aside money for taxes—plan for 20–30% of your income.
• Missing quarterly payment deadlines, which leads to penalties and interest.
• Forgetting to track deductible expenses and keep receipts.

✅ Tips for Staying Compliant

• Keep a separate bank account for freelance income and tax savings.
• Use accounting software to track earnings and expenses.
• File Schedule C (Profit or Loss from Business) with your annual Form 1040.
• Consider hiring a CPA if your business income is growing or complex.

🔍 Glossary Summary

Further Reading

• IRS Official Website
• Self-Employed Individuals Tax Center
• Paying Your Taxes as a Freelancer