Depending on your field, freelancing doesn’t need to have a lot of expenses. All you really need is a computer, internet access, and plenty of coffee. One cost you can’t avoid as a freelancer, though, are your tax bills. Unlike typical W-2 employees, freelancers have to pay quarterly taxes at a rate of just over 15%, and that’s a big bill, especially if you’re not being paid on a regular basis. This leads many freelancers to fall behind on their taxes. [Read more…]
When you first went freelance you likely heard horror stories about having to wait for months for your work to be published so that you could finally get paid for it. Other freelancers told you all about that time they had to hound a client like crazy to get them to pay for work that had been completed. You were prepared for that. You were prepared for potential clients to convince you that you should work for “exposure,” and to have to work your way up to the big publications and really well-paying work.
What you weren’t prepared for were taxes. [Read more…]
Most everyone does a Christmas countdown, but I don’t know a single person who does one for Tax Day. We might as well do it since there is no escaping paying taxes – unless you want a visit from the IRS.
So, 32 days till that wondrous day: April 18. [Read more…]
You have this freelance writing thing down cold. Your writing sparkles with informative content that educates and entertains audiences of all ages and backgrounds. Editors are calling on the hour with request for more work at whatever rate you name. You finally ditch that boring nine to five job and now spend your days with your laptop in that trendy coffee shop where all the cool people hang out.
Wait, that is not what is happening to you? Me neither. However, we are working, and getting paid, so it’s not all that bad.
Speaking of getting paid, you will have to report that income to the IRS. Since you are getting paid as a freelance writer, you are not an employee so you would not get a W-2 like at your regular job, but would get a 1099-MISC. Additionally, your clients will need to report how much they pay you to the IRS if they paid you more than $600. They would use Form 1096 to report all the amounts they paid to freelancers, and would send you a Form 1099-MISC which shows the amount they paid you for the articles you wrote.
The IRS requires that you get these by January 31st every year, so you should receive them in the mail in late January. There are a few things you should do once you receive this from:
- Make sure you did work for the person or company who sent you the form. Keep in mind that the name on the form may be different that who you normally deal with as you may have been dealing with a subsidiary, and the 1099 would have come from the parent. If you didn’t do work for the company or person who sent it to you, the company who sent it to you may be trying to defraud the IRS by over reporting the amount in expenses they had. If you hadn’t done work for them, contact them for an explanation. If you can’t get a satisfactory answer, contact the IRS.
- There is a box labeled RECIPIENT’S Identification Number. Make sure that this is either your social security number or the Employer Identification Number (EIN) you were assigned when you registered your company with the IRS. If it doesn’t match, get in touch with the sender to correct it.
- If you got royalties for your work, these would show in Box 2 of the form.
- You may be subject to something called backup withholding if you did not give a taxpayer identification number to the person or company who paid you. You will have had to have given a W-9 containing this information to the person or company paying you; otherwise you will be subject to backup withholding. Box 4 on the 1099-MISC will show the amount of backup withholding taken from the amount owed to you. If you had backup withholding, check your records to see if you sent them a W-9 with your information. Contact the company if you had sent them the information so they can adjust their records, and send you a corrected 1099-MISC.
- Box 7 will show the amounts paid to you as a writer. This amount will need to be reported on Schedule C of your tax return. Check this amount with your records to see if the amounts tie to what you billed the company. Contact the person or company who sent it to you if there is a difference in what your records say
- Box 11 will show the amount of foreign tax you paid. You may be able to either deduct this or claim it as a credit on your tax return. Box 12 will show to which country the tax was paid.
Dealing with form 1099-MISC is just part of doing business as a writer and is nothing to be nervous about. An understanding of what is on the form will help you to properly report your income on your taxes. If you run into something you don’t understand contact a good accountant, who is always happy to answer questions and help out people who need assistance with tax matters.
In accordance with Circular 230 Treasury Department Regulations, we are required to advise you that any tax advice contained in this article may not be relied upon to avoid penalties under the Internal Revenue Code. If you are interested in a written opinion that can be relied upon to prevent the imposition of tax-related penalties, please contact the author.
About the Author
The author, Chris Peden, CPA, CMA, CFM, has over 15 years of experience with helping people and companies with organizing and making sense of their finance information, as well as meeting their regulatory compliance requirements. He is also available as a freelance blogger if you need an article on finance, accounting or taxes for your blog. He can be reached at [email protected], and his website can be found at http://cmpfinancialconsulting.homestead.com/.
Image via 401(K) 2013
Just because you’ve ditched your 9 to 5 job does not mean you can get away with not paying taxes, does it? Believe it or not, in some parts of the world, many freelancers are able to do that, but if you reside in the United States, then you are really better off sticking to the law and keeping your taxes in order.
Sure, it may not be a pleasant thing to monitor and organize your finances so that you can do your civic duty, but it is the right thing to do. In any case, your taxes come back to you in one form and another, and unless your freelancing business is totally over the top, the chances are that you will not have to pay all that much anyway. And, just in case you are struggling with making ends meet – and having to deal with taxes at the same time – there are many resources which can assist you and provide tax relief.
Here are a few tax tips that every freelancer should know about. They will get you a long way.
Pay close attention to the separation of work and personal activities.
This is an absolute necessity if you want your home office to be tax deductible. Anyone can designate a room, or even just a corner in the house, and call it a home office. The trick is to ensure that this area is used solely for your freelancing activities. This cannot be emphasized enough, because the IRS tends to crack down emphatically on home office declarations.
This means that if you use your laptop for personal purposes (on top of work-related activities) and work from the sofa (which also doubles as the TV-watching center), the area will not qualify as a home office.
Deduct health insurance premiums.
Did you know that if you are a self-employed taxpayer, you can deduct 100 percent of your health insurance premiums? Even better, the health insurance premiums for your children and dependents are also covered. If your spouse does not have coverage via their employer, you can deduct his/her health insurance premiums as well.
What you need to take note of: The insurance plan must be taken out for the business.
As a freelancer, you are not sure exactly how much income will come in every month. You may opt to take care of the calculations when tax payments are due, of course, but more often than not, that makes things more difficult. My tip is for you to make estimates for your payments.
While you may not have the exact figure in mind, having a ballpark figure will help you manage your finances better. Another thing I strongly recommend is to put aside money for your taxes monthly. Make this a non-negotiable. At least you will have something set aside for when tax season comes around, and if you set aside more than is necessary, you will have some extra money.
What are your tried and tested tax tips for freelancers?
Image via 401(K) 2012 on Flickr
For many writers, math is not a strong suite. Creativity comes easy, but when it comes time to worry about taxes, writers often run the other way. The danger that goes along with freelance writing is the idea that you do not get a formal paycheck. While a traditional job will take care of the taxes for you, in general, freelance writing probably won’t. In other words, it’s in the hands of the writer to set money aside for taxes.
Now to make things even more complicated for those who despised math growing up: there are different types of taxes that you have to pay. Consider the two types of taxes all freelance writers should be saving up for before April hits: [Read more…]
Practically everyone dreads tax season, but if there is one thing that can get people all excited about taxes, it is the idea of receiving a tax refund. Even if the money is already actually yours from the start (it’s not like you are earning additional income when you get your money returned to you), having that cash on hand is still a welcome thought.
How do you receive your tax refund? Check or direct deposit?
There really are no strict rules as to which method you should choose. You ought to know, however, that the IRS prefers to use the direct deposit method simply because this costs less and also is faster than sending out checks.
On your part, it also would be better to opt for direct deposit. How so? The reasons are practically the same.
- Transactions are faster via direct deposit. Transactions are practically instantaneous and the IRS sends out tax refunds via this method before they send out paper checks.
- The chances of you actually getting the money are higher. That’s because there is no check that might get lost in the mail. We all know just how efficient the postal service can be at times!
- The direct deposit option is FREE. You do not have to pay extra to have your tax refund sent directly to your savings account or checking account.
However, there is a drawback to direct deposits. It is something that can be avoided, though. If you choose to use the direct deposit, you have to be extra careful with inputting your bank account details. Every letter and number must be correct, otherwise you risk losing your tax refund. There have been horror stories wherein it took tax payers years to get their tax refund back because of a slight error. In some cases, they never got the money back. This is where checks have an advantage – it is easier to retrieve the money if someone cashes the check.
Bottom line: you have everything to gain by choosing the direct deposit method. It won’t kill you to make sure that your bank information is 100% correct anyway.
I receive a lot of emails and comments on Freelance Writing Jobs posts asking the same question:
I don’t live in the United States. Can I apply for U.S.-based freelance writing jobs?
Since it’s such a common question, I want to provide an answer publicly. Here goes…
Can you apply? Yes. The hiring manager will determine whether or not they’re willing to work with a writer outside of the United States. You’ll never know if they’re willing to do so if you don’t apply.
When it comes to freelance writing, you’re not an employee. You’ll either be paid as a contractor or a vendor and that means you’ll receive that payment as miscellaneous personal income or as earnings for your business. Tax rules vary from one country to another, so what really matters is how the client is willing to pay you and how they want to report those payments to the Internal Revenue Service.
These days, many clients are happy to pay via PayPal, which offers an automatic currency conversion (which may or may not require you to pay fees depending on how both your account and your client’s accounts are set up). That means they can simply send money to you via PayPal as they would any other vendor and PayPal takes care of the rest. Banking-related issues that used to make it more difficult for clients to pay vendors outside of the United States are not as prevalent anymore thanks to tools like PayPal.
Keep in mind, I’m not an accountant, and this answer is based on my own experiences writing for clients outside of the United States and witnessing clients who pay multiple writers in various countries around the world without any problems. However, the bottom-line answer to this common question is still yes. There is no reason why you can’t apply for freelance writing jobs if you’re not from the United States unless the job description specifically restricts applicants to U.S. citizens.
A final suggestion: it is worth your time and effort however to consult with someone in your country who understands business, income, and tax-related issues so you set your freelance writing business up in the best way from the start.
Some people would go as far as to “forget” to declare some of their income. I think we’ve sufficiently discussed the repercussions of not declaring all of your income in the previous post. This time, I’d like to bring up the idea of engaging in certain practices that I personally find questionable.
At the top of my list: hiring family members to work for you so that you can make some tax savings because of medical health insurance and wages. Here’s one source which actually suggests these two points. One, it suggests hiring your spouse as an employee. As the employer, you can then provide medical benefits to your employee and then enjoy an additional tax deduction. Two, it suggests hiring your children:
Sole proprietors who hire their kids to do data entry, answer phones, clean the office and perform other business-related activities can deduct their wages on Schedule C, as long as the compensation is reasonable for the type of work performed. Wages paid to the children are exempt from Social Security tax if they are under 18 and are not subject to federal unemployment tax if they are under 21.
In addition, unless the child has a lot of unearned income, chances are that he or she won’t owe income tax on the wages, which lowers the family’s tax bill considerably. Also, a parent can make a contribution to an IRA or a Roth IRA for them based on their wages.
I don’t know if I am being too conservative here, or maybe I am just missing something. I’ll throw the ball in your court, guys. I’ve got two questions for you:
- What do you think of these two suggestions as ways of trimming your tax bill?
- Are there any tax deduction “techniques” that make you feel uncomfortable? If so, what are they?
Photo credit: Foxtongue
I’ve heard it said so many times that I can’t keep track of it: what you don’t know won’t hurt you. For some, ignorance is bliss. Maybe in some cases, this can be true. However, if you project this kind of thinking to the IRS, you might find yourself in deep trouble.
How many times have you been tempted to NOT report income because you think that the IRS will not be able to track it anyway? Perhaps your best friend might have told you – if you can get away with not reporting something, why not? Or maybe another freelance writer has shared experiences wherein he/she did not report part of his/her earnings and didn’t have any trouble.
Do you really want to risk it? If anyone can track an individual’s earnings, it’s the IRS. What the IRS doesn’t know may not hurt it, but it will probably hurt you. In fact, I’d go as far as to say that what the IRS doesn’t know just might make it even more curious.
So what is there to do? If there is one rule that you ought to remember when it comes to your taxes, it is this: declare everything. Don’t even think that you can hide.
I am not trying to make out the IRS as the big bad wolf here. All I am saying is that – cliche as this may be – honesty is the best way to go. You earn money. You pay taxes.
Now here’s something to think about: How many times have you been tempted to hide part of your income? How many times have you actually done it? (Not that I am expecting any answers for the second question.;))
Photo by howcheng