USA tax question for freelancers

[Aaron2004]

Hey all,

 

I'm doing a few odd jobs here and there. This spring I hope to make a some money through contract work (>$1,000). Although I'm looking at the IRS website for info on self-employment tax, can anybody talk cave-man to me about what I need to look out for with estimated taxes, etc? If I have to pay my taxes quarterly, I guess I should start thinking about that.

 

Also, how do you guys view right-offs? I don't anticipate my contract work lasting for more than a half a year, but I still need to buy a new PC and software to finish the project. If I was going to buy a new PC soon anyways, is it legit to write it off or do you have to use the equipment only in your business?

 

Thanks,

 

Aaron

[luckymutt]

The best advice you'll get will be from a CPA. Most will give a free initial consult and it would be worth it to have them do your taxes for you.

 

That being said, the first year I did any freelancing that I had to file I learned the hard way how steep the self-employment rate is. I don't recall the rate itself, but it will make you shudder.

I was convinced by both an accountant and an attorney to set myself up as an LLC. Cheap and quick to set up and it will save you a hassle at tax time (as well as protect you and your personal assets if someone were to decide to sue you)

 

As far as write-offs go, it doesn't matter if you were planning on getting a new PC or not. If you use it for your business, it is a business expense and you can write it off. That also includes things like your cell phone. You can even assign a portion of your rent for a business expense.

But that is all the stuff you would want to speak to an accountant about,not us

[erickdt]

Hi Aaron,

 

I had for years done freelance work until I got my current job usually in the area of $3K-$6K a year, none of which was taxed up front. Come tax time I recieved a 1099 MISC form from the company I did the work for. I believe the percentage you are taxed has to do with the tax bracket that you fall into. At the time, I was in the second to highest bracket which was a 25% tax rate. You'll also have to pay self employment tax which is basically just social security tax being taken out on top regular tax. I'm not exactly sure what that rate was though...

 

When doing 1099 MISC work you are not required to file quarterly. That's only if you have a real, registered business. In my case, I didn't even recieve my 1099 until the end of January so I couldn't have filed quarterly even if I wanted to.

 

Long story short, on my "best" year where I made close to $10K doing freelance I wound up owing the tax man $3500 which was not an ammount of money I had on hand. I wound up having to take a loan from the IRS at a 12% interest rate. After that I understood where Republicans were coming from...

 

The moral of the story here is you should definately figure out how much you're going to owe (from a tax professional) and squirrel it away for when your taxes come due.

 

As per the question about writing off your workstation: You can definately do that. There is definately a gray area as to whether or not computers can ever be truly just for work or for personal use but when it comes down to it it is logistically impossible for the IRS to verify whether or not everyone in the country who writes off a computer is or isn't using it exclusively for business. All of that considered, you ought to be fine.

 

Hope this non-professional opinion helps!

 

E

 

Hope this helps.

[Chad Warner]

Last time I dealt with self employment taxes I think its was a 15% straight up tax on the income, then any additional taxes you may owe on top of that.

[Aaron2004]

I'm finding a 15% tax rate as well...more like 15.2% or something..but who's counting? My only concern with writing all this equipment off is that it could look really suspicious. I only anticipate making about 10k from all this. I COULD write off my cell phone, a new computer, software, etc...but in all honesty, those expenses could go ABOVE how much I may make. That would be awesome for my taxes, but may be ripe for an audit. Then there's that gray area...I only plan on using those for my business in the spring and keep it for personal use for the rest of the year.

 

Either way I do agree I need to talk for a bit to a CPA. I may also purchase some vasoline on the way to help the tax man out a bit.

 

Aaron

[BrianKitts]

I will preface the following statement by saying I'm not a CPA, I just have what I've learned and been told over the years when I used to freelance.....

 

In the US, as an independant contractor (freelance) it's a safe estimate would be to assume that you are going to lose about 35-40% of your income to Uncle Sam. Remember that when you're self employed, you're not only paying your share of the taxes, but also the employers share.

 

When I was freelancing I setup two banking accounts, one in the name of the company (so I could cash checks) and a second which was an internet savings account. The point of the savings account was that when I got paid by a client I would cut the money in half, 50% went into that savings account to pay off the IRS, the other half went in my pocket to blow on whatever frivolous thing I was obsessed with at the time. Every quarter I would pay off the IRS with the money in the savings account. I over-saved on purpose to be safe at the end of the year I had a few thousand leftover in the savings account in excess of what I owed the IRS so it was like my own personal Tax return. Only instead of uncle sam having the money and making the interest through the year, I did! That was also the reason for the internet banking account.... because it's more automated they can afford to give out higher interest rates, I was earning about 7% at the time. Now you'll be lucky to break 2%

 

Now the first year that you are making a profit as a freelancer, you can pretty much get away with not making the quarterly payments (I'm not recommending it, just saying you can get away with it). However after the first year that you file your taxes with a couple 1099s, you better be making those quarterly estimates. One of the biggest flags you can throw up is if you make even more money the following year and aren't making the quarterly estimates, that's the quickest way to get noticed and get fined a penalty by the IRS.

 

As for the write off's..... write off EVERYTHING YOU CAN that has to do with the business. Gas / mileage to meet clients, grabbing lunch with a client, and of course your equipment.... throw it all in a Schedule C at the end of the year to cut back on how much the IRS is going to rape you. If you plan on doing a lot of work and have an extra bedroom to call your "office" you can even write off part of your mortgage or rent payments. Just know that there are a couple of IRS rules on that one along the lines of that has to be the primary use of that room. As long as it's for the company when you are writing it off then you are in the clear.

Edited March 1, 2010 by BrianKitts

[Sawyer]

The main advice I would have is to invest in a CPA and a software like Quickbooks. Now if you are only planning to make a little you wont be considered self employed. I forget how it works but there is a classification for making money on the side. And dont plan to not write off your equipment just because you think it may be fishy. But a good CPA can lead you through all of this.

 

Quickbooks or similar software is really needed to organize your finances. There you can track every cent you spend. Calculate your square footage of your office (assuming you are working from home) and use that ratio of work space to figure all of your utilities & mortgage.

 

And yea assume 30% of your income is tax if you are a full time self employed.

[ihabkal]

I have been really depressed about leaving the US but remembering the taxing it kinda makes me happy I am no longer under the long arm of the IRS.

[Devin Johnston]

As a freelancer I take 25% off the top and stick that in a savings account, Brian is right about making quarterly payments you really need to do this because it just makes it easier when tax time comes around. I do all the work under my name so I just treat it as extra income when doing my taxes, so far that has worked. I agree with the others though getting a CPA is probably the best thing to do, it keeps you from guessing.

[Ernest Burden III]

I will preface the following statement by saying I'm not a CPA, I just have what I've learned and been told over the years when I used to freelance.....

 

Me, too.

 

Remember that when you're self employed, you're not only paying your share of the taxes, but also the employers share.

 

That's where the 15% comes from--you pay the same Social Security tax of 7.5% that any employed person pays, but you also pay the employer's 7.5%

 

As for the write off's..... write off EVERYTHING YOU CAN that has to do with the business. Gas / mileage to meet clients, grabbing lunch with a client, and of course your equipment.... throw it all in a Schedule C at the end of the year...

 

Sometimes things like computers need to amortized over some period of years of useful life, meaning you cannot get the full write-off in the first year. You'll have to look that stuff up to be sure.

 

Creating a corporation or LLC is a good idea, but then you have to have a CPA audit your books. No DIY taxes. The same accountant who may do your non-corporate taxes for $400 will likely need many times that for a corporation. However, once a corp., you stop generating so many red flags. You can deduct more stuff and more easily, etc. I've been a corporation for 15 or 20 years now. Love it. Sole-proprietors (that's government talk for 'freelancer') have a big ol' target painted on their backs. If you happen to live in New York City, which has an income tax all it's own, and earn a living as a freelancer, you get hit with NYC's special 'unincorporated business tax' on TOP of your federal, state and NY city income tax, then the self-employment tax to ice the cake. Becoming a corporation really streamlined all that. Moving out of New York City put many thousands of dollars back in my pocket every year.

 

Oh, one more thing--it's natural to fear to IRS, but the real threat is your state tax department. They will destroy you if you do the slightest little thing 'off'. They're like mall cops with authority over your bank.

 

And sales tax--you need to find out if you will be required to collect sales tax on your work, else you end up dealing with that state tax office.

 

Still want to freelance?

[Devin Johnston]

Just make sure you're client knows you only accept cash

[Chad Warner]

Just make sure you're client knows you only accept cash

 

That is definitely key!