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Tax Tips to Live By for the First-Time Freelancer

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tax tips for freelancers

Working for yourself isn’t always what you expect. And one thing many newbie freelancers are unclear on is how their freelance income will impact their tax situation.

Tax time may be over for 2011, but if you’re a brand new freelancer starting out, your tax time begins now.  So here are some basics you should know when it comes to your new relationship with Uncle Sam. Bear in mind these are general tips meant to educate freelancers just starting out; whether you’ve gone full-time with employees or your freelancing is just a side hustle for now, you should consult a CPA for professional advice and guidance in all cases.

Freelance Taxes 101

Get yourself a good CPA. I never thought I’d be fancy enough to warrant needing an accountant. And I know it seems like a big expense when you’re just starting out. But I’m so grateful a self-employed friend convinced me to visit her CPA.  I had no idea what I was in store for, and knowing I now have someone knowledgeable looking out for my interests is a huge relief for me in this new territory.

Oh, and did I mention that any accountant’s fees you incur in connection with your freelancing can be deductible as “professional expenses?” So there’s really no reason not to get a CPA.

If you make $600+ from any one client, you need to report it. Each client this applies to should provide you with a 1099-MISC form at the end of the year listing how much they’ve paid you, which you then include with your tax return.

If you net $400+ for the year, you have to pay self-employment tax in addition to income tax. This was a particularly nasty surprise for me. If you work for yourself or as a 1099 contractor, you are essentially double-taxed as both an employer and an employee. (I know; way to encourage entrepreneurship, USA!) In my case, that means a solid one-third of every dollar you bring in will go right back to the government.

So, in the wise words of my CPA, “Don’t take that big project you just got paid for and go on vacation with it.” Start setting aside your tax percentage now—ideally in a separate savings account you won’t be tempted to touch—or else you may be unpleasantly surprised when tax time comes.

You now have to pay quarterly. The good news is that if this is your first year of freelancing, and last year you had no freelance income to report, you don’t need to worry about quarterly payments just yet. (Remember, you only have to report if you’ve made more than $600 for any client. So if you started freelancing mid-2011 and only managed to earn $300 for the year, that doesn’t count as reportable income. Your first freelancing year technically starts now in 2012.)

If this is your first year, you can wait till the end of the tax year to file, at which point you can also get a better idea of what your estimated quarterly payments will be next year. After year one, if you expect to owe the government $1,000+ (after deductions), you will be required to make estimated quarterly tax payments.

These will be due on January 15th, April 15th, June 15th, and September 15th. You don’t have to worry too much about the precision of your estimate; if you estimate too high or too low for any quarter, you can fill out a form to recalculate what you’ll owe the next quarter.

Track your business expenses. The major rules for writing off “home office” and other business expenses (although you’ll want to clear specifics with your CPA) include:

  • For a room to be considered a home office, it must be used it solely for business-related activities. (In other words, if you what you have is a home office/kids’ playroom/den, get rid of those slashes.)
  • You can deduct things like computers, ink and other office supplies, phone plans, mileage spent driving to a client’s office—anything you need to pay for in order to keep your business running. (Within reason, of course. Getting too deduction-happy can raise red flags you don’t want raised. As always, defer to your CPA’s advice.)
  • If you have a dedicated home office, you can also deduct a portion of household expenses like mortgage interest, rent, utilities, and insurance based on what percentage of the square footage of your home is made up by your office.

Solid recordkeeping is so worth your time. Keep a separate insert in your filing cabinet for any potentially deductible expenses so you’re not scrambling at the end of each quarter to track down receipts.

For household expenses like utilities for which you’ll be deducting only a percentage, it’s a good idea to start a running spreadsheet to keep track of what you’re spending over the course of the year. Each month when you pay your heat, electricity and other bills, enter the amounts on the spreadsheet so that come tax time, everything is all there for you to calculate your percentages. It’s a few extra minutes each payday to save you a ton of hassle later on.

Are you just starting out as a freelancer? Tell us about it!

Kelly Gurnett, a.k.a. “Cordelia,” runs the blog Cordelia Calls It Quits, where she documents her attempts to rid her life of the things that don’t matter and focus more on the things that do.  You can follow her on Twitter and Facebook.

Brazen powers real-time, online events for leading organizations around the world. Our lifestyle and career blog, Brazen Life, offers fun and edgy ideas for ambitious professionals navigating the changing world of work.

  • http://youhavemorethanyouthink.org/ Shawanda

    Although I am a CPA, I’m not the kind who does taxes. However, I do know a bit more than the average non-CPA.

    I quit my job at the end of last year and decided to continue my health insurance coverage under COBRA. I thought I’d be able to report payment of health insurance premiums as a straight up Schedule C deduction. After doing a bit of research, I discovered that because I don’t own my health plan (my former employer does), I have to report health insurance as an itemized deduction under Schedule A. That’s pretty much no deduction at all since my standard deduction will certainly be greater than any itemized expenses I may have. That’s not fair! Yet another way our government encourages entrepreneurship. USA! USA! USA!

    • http://www.cordeliacallsitquits.com Cordelia

      It definitely is frustrating all the hoops you have to jump through and T’s you have to cross when you become a freelancer. If you think you’re just going to make a fun side income and not have to worry about being a “business person” about it, think twice!

  • http://www.facebook.com/jungerpants Jason Unger

    Shawanda, definitely check out personal health insurance from a site like ehealthinsurance.com … you have a ton more flexibility and don’t have to pay the 102% cost with Cobra.

    Check out a high deductible plan with a health savings account, and you’ll save big bucks and get the tax write off.

  • http://carefulcents.com/ Carrie Smith

    This is a great place for freelancers to get started with taxes. I agree about finding a CPA (or other tax professional) to help get you started off right. Even though I worked as a Tax Specialist for 3 years, when I began doing freelancing, it was pretty overwhelming. I’m glad I had a little bit of knowledge with some back up from co-workers. The record keeping is definitely worth the time too!

    • http://www.cordeliacallsitquits.com Cordelia

      I was definitely taken aback by my first visit to my CPA–I had no idea how much would be taken out for taxes! Freelancing is such a special situation–especially with the questions of what you can deduct, etc.–that you really do need some expert guidance to make sure you’re doing everything right. The IRS is definitely someone you want to stay on the good side of!

  • Christina

    this is great – thanks for sharing these tips! Does anyone have any recs for further reading on taxes 101 for freelancers? Also, what if you are a sole person LLC?

    • http://www.cordeliacallsitquits.com Cordelia

      I’d definitely recommend speaking to a CPA if you’re a sole person LLC, an S corp, or any other entity that goes beyond just basic 1099 contracting. They can help you work on the specific requirements you face and needs you might have.

  • http://www.vouchercodes247.co.uk/ Voucher Codes 247

    great tips thanks, starting out on my own

    • http://www.cordeliacallsitquits.com Cordelia

      Good luck! :)

  • http://twitter.com/IamNateDavis Nate Davis

    Solid advice Kelly! I pay a CPA $500 to do my taxes, but the peace of mind and freedom from having to deal with something I hate is more than worth it. One other thing I’d note: get the CPA (or other financial person’s) advice on filling out W-4’s, since the number of allowances you take will drastically affect each paycheck, and therefore how things shake out in April.

    • http://www.cordeliacallsitquits.com Cordelia

      That’s an excellent idea. Thanks for the tip!

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  • http://www.mightymattresses.com/ Joe @ Mattress Stuart

    Wow! I’ll follow all this tips right away, i’ll browse my records and try to figure out things.Thank you for this post.

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  • http://www.simondewey.co.uk/ Simon Dewey

    I always kid myself that I’m going to get on top of my finance. Maybe this year!

    • http://www.cordeliacallsitquits.com Cordelia

      If it makes you feel any better, I haven’t yet taken my own advice of compiling a spreadsheet of expenses to make it easier at the end of the year. Not like it’s already the middle of the year, or anything… :P

  • http://www.facebook.com/bluetaxinc Blue Tax

    Thanks for the tax tips for those people who do a lot of freelance work. It seems there are a few different things to keep in mind throughout the year.

    • http://www.cordeliacallsitquits.com Cordelia

      There absolutely are. I’m so glad I went to see a CPA before I got too far into my first year!

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  • http://www.lifecommaetc.com/ Sarah Greesonbach

    How much are we talking for that initial CPA visit? More than $100? Less than $500? Woof.

    • http://www.cordeliacallsitquits.com Cordelia

      Not sure since my first consultation was free of charge (friend of a friend), but the good news is that any expenses you incur with a CPA (or lawyer, or any other professional service) in connection with your business can ALSO be written off!

      So really, you get to write off the guy advising you on what to write off!

      • http://www.lifecommaetc.com/ Sarah Greesonbach

        My goal for February is to register our DBA names…. I’ll nail down the basics and then meet with a CPA, haha. Though I have found some online CPA blogs that I LOVE!

  • http://www.facebook.com/rmcleve Rachael Cleveland

    I wish I had read this a long time ago. But, when I first started researching freelancer tax tips, I’d get that terrible pain in my gut that turned into a frown on my face than turned into total panic. Now that I’m digging around and getting everything set up, I’m seeing just how very much I should have continued despite the panic. Thank you!

    • http://www.cordeliacallsitquits.com Cordelia

      It’s definitely intimidating when you first start out–I’m so glad I met with a CPA to help explain things to me. It takes some bookkeeping and extra work, but it’s not impossible. We can do it!

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