Taxes for the Freelancer

I was just chatting with a friend who was wondering what to do about her taxes and I thought maybe I’d pass on some thoughts to you, my fearless, loyal readers. If you’re not a U.S. citizen or living/working in the U.S., you can read this for curiosity’s sake or move along. I won’t keep you. And for gosh sakes–talk to a professional tax preparer. I am not one.

When should you file your own taxes?

I haven’t done my own taxes in five years or so. Partly it’s because I’m lazy, partly it’s because I lack the patience to read the tax forms, and partly because I’m not particularly good with math. If you can relate to all of those statements as well, you might want to give H&R Block or some other tax-assistance business out there. The reason I liked H&R Block is because they will represent you in the event you’re audited. They get paid by taking a chunk out of your return or by payment at the time you submit your return. However, there are times when reality should overcome laziness and you should just do things yourself, especially if you can answer “Yes” to the following:

  • Can you do math or use a calculator?
  • Did you have only one employer, customer, or source of income in the past year?
  • Do you have minimal investments or unusual sources of income (rental properties, agricultural exemptions, etc.)?
  • Did you have only one home address in the past year?
  • Did you give to only one charity?

If the answer is “No” to all of the above, give some thought to talking to a professional tax preparer.

Handling sources of income

If you’re a full-time employee, you receive a W-2 form at the end of the year showing how much money you were paid and how much money was taken out for taxes. W-2s are usually submitted along with your 1040 or 1040 EZ form.

If you’re a contractor/freelancer, you’re more likely going to receive a 1099 form, which is the same thing, but all it will show is how much you were paid; contractors do not have taxes taken out of their pay–you have been setting aside money for taxes throughout the year, haven’t you? I’ll get back to that in a bit. Incidentally, you keep the 1099s for your records, they don’t get submitted with your 1040 SE form…at least this fiscal year (2015). Because you only get 1099s by the end of February the following year, it’s a good idea to keep track of your income as you acquire yet, as freelancers pay their taxes quarterly. And that’s perhaps the major difference between full-time employees and freelancers: full-time employees have their taxes taken out of their paycheck before it ever hits their bank account; freelancers write a check every quarter, so they’re often more conscious of what they’re paying in taxes. It’s eye-opening, to be certain.

If you’ve got a wide variety of income sources–stock dividends, residual payments, rental property income, agricultural exemptions–you’ll be filling out other forms as well. Taxes are fun (cough).

Handling business expenses

Another thing you need to be doing throughout the year, in addition to setting aside money to pay your taxes quarterly and at the end of the year, is to keep the receipts from your business-related expenses. What are those? Just as a sampling:

  • Moving expenses: Did you have to move as a result of changing your job? Save your receipts: the movers (or truck); the packing materials; the hotel, gas, and food charges you picked up during the move.
  • Travel: Did you pay for travel to a conference out of your own pocket (and were not reimbursed by a client) in connection with your work? Save the receipts or at least track your credit/debit card statements from the airline, hotel, rental car, and parking so you can claim those as part of your cost of doing business. If you were reimbursed by your customer, do NOT then claim them on your taxes as well–that’s called double-dipping, and it’s illegal. The U.S. Government’s General Services Administration has limits on how much you can claim for hotels, meals, and incidental expenses (MI&E) per diem (per day). And note that the per diem rate varies by city or metropolitan area.
  • Meals: Did you pay out of pocket for business lunches or dinners? Save those receipts. Be realistic and honest about what constitutes a business meal, though.
  • Coworking: You can claim coworking memberships and the mileage you incur to drive to and from that location.
  • Medical expenses: You can claim your insurance premiums as a direct business expense, plus out-of-pocket expenses (pharmacy, doctor visits, mileage to/from doctor offices, etc.) if they exceed some magic percentage of your income. If you don’t know how much you paid out of pocket, check some of the statements you got from your health insurance provider–they’ll tell you how much you paid out of pocket.
  • Other expenses: This includes things like your telecommunications expenses (phone, internet, cell phone); professional memberships; parking and tolls; and business mileage.

I have other thoughts on legitimate and non-legitimate expenses here.

What you’ll be paying for

Now on my second year of freelancing, I started setting aside around 50% of my income throughout the year–both for rainy-day savings and for tax purposes. I presume that, at the worst, as much as 35% of my income might get gobbled up by Uncle Sugar.

I’m operating as a sole proprietor, so in addition to income tax, I also need to pay self-employment tax. So far as I can tell, it’s the individual equivalent of paying “corporate taxes.” If you set up a Limited Liability Corporation (LLC) or some other official company, you’ll have a whole new set of paperwork to fill out. Don’t ask me about that, I know nothing.

I have to pay into FICA because just as my customers didn’t take money out of my pay for tax, they also didn’t take money out for Social Security and Medicare. As a full-time employee, your employer contributes half of your 12.4% FICA contribution; as a freelancer, you pay the whole thing. If you live in a state with an income tax or you own a house and pay property taxes, you have to set aside money for those as well.

Summary

So, to keep yourself on the right side of the IRS:

  • Pay your taxes, even if you’re paid in cash.
  • Track your income and set aside money out of everything you earn so you can pay your taxes when they’re due–quarterly or annually.
  • Save your receipts for legitimate business expenses.
  • If you’ve had a lot of transactions, sources of income, and expenses in the past year and are confused, intimidated by, or overwhelmed by the tax-preparation process, talk to a professional preparation service and bring along whatever paperwork you have.

You can do this.

About Bart Leahy

Freelance Technical Writer, Science Cheerleader Event & Membership Directior, and an all-around nice guy. Here to help.
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