If you’re making the switch to freelancing, it’s easy to miss some of the details that go along with completing your taxes. There are some major differences in the paperwork if you’re working for a company or if you’re self-employed. While there are plenty of ways to save money on your taxes or even make them easier to complete, there are some nuts and bolts that every freelance writer should know.
The Question of Quarterly Estimated Tax Payments
As a freelancer, you don’t have a boss — which means that you don’t have anyone handling your taxes during payroll. You’re completely responsible for making sure that your taxes get paid. In the US, the IRS has created a system where anyone who is self-employed submits tax payments every quarter. The amount is based on how big your tax liability was on last year’s tax return, although if you’re making more money this year, the IRS expects you to bump up your payments.
Not getting those payments in on time can result in penalties, although some freelancers may have a little more room to maneuver. If you have a job where a certain portion of your paycheck gets withheld for taxes or it’s your first year freelancing full-time, you may have a little more flexibility.
Watching Out for Form 1099
Any US-based client you work with probably will be reporting the money they’ve paid you to the IRS with a Form 1099, which is used specifically to report income paid to anyone who is a contractor or otherwise self-employed. You will receive a copy of any Form 1099 submitted by the beginning of March, so that you can use it to complete your own taxes. Unfortunately, it isn’t impossible for a client to send you an incorrect form (or forget to send you a form entirely). It’s important to double check each Form 1099 against your own records to make sure that the information is accurate.
Get Every Deduction You Can
As a freelance writer, you can write off any necessary business expenses as deductions on your taxes. Whether you had to pick up a new computer or you pay for a phone line for your business, you can reduce the amount of money you are expected to pay in taxes by claiming these deductions. You can even claim a portion of your home expenses (like your utility bills and rent) as costs of doing business as long as you have a dedicated home office.
What’s Coming Next
We’ll be getting into the gritty details of claiming taxes, reducing the amount of taxes you have to pay and the typical tax problems freelance writers can run into. However, I need to offer a disclaimer: it is important to remember that everyone’s tax situation is different — in order to make the right decisions about your own taxes, it’s important to talk to a tax professional who can walk you the specifics of your own tax situation.
Note: As someone who has run his own corporation (full C) for 17 years, the 1099s have NEVER matched up with actual income. Not all clients send them. But someone should expect to receive them, even if they come in a little late.
It’s also best to keep some tabs on taxes/income/expenses throughout the year, not just try to play catch up at the end.
Before you even think about attempting to deduct any part of your rent/mortgage/utilities because you have a home office, answer this question truthfully: have you ever paid bills or made a grocery list at your home office desk or played around on Facebook on the computer? Then you’re not using the home office exclusively for business and fail one part of the IRS’s two-prong home office test. Are they ever going find out about that? I don’t know, but I’d be very careful and cover all my bases before trying it.
Thursday Bram says
@Phil, I’ve had more than a few of those mismatched 1099s myself. You’re definitely correct that you need to make sure to keep your own records — and pay the correct amount. I’ve actually had clients go back and file an amended 1099 for $2,000 more than they had originally filled out the form for — if I had paid the IRS based on the original 1099 my client sent out, I would have had to file an amended return myself.
@Matt, I do think it’s important that a home office be dedicated to your freelance writing business in order to take the deduction. However, the way that the IRS tends to enforce that requirement is less concerned with the occasional grocery list and is more concerned with whether the room doubles as your bedroom or the kids’ playroom. An agent can take a stricter stance, but those I’ve talked to are more concerned with flagrant abuses of the deduction. In the end, I’d suggest talking to a tax professional before making a personal decision either way.
I’ve had a CPA tell me (not my accountant, I do my own bookkeeping and taxes) that 1099s NEVER match up. I’ve even had CPA clients (publications that go to CPAs) fail to send them to me.
T.W. Anderson says
Always hire an accountant to help you get through the mess.
I ran an S corp for years in Colorado. SAVE EVERY SINGLE RECEIPT you get! I cannot stress that enough. Get a filing cabinet, and break it down into sections…deposits, withdrawals, groceries, misc., expenses, travel, whatever…make as many categories as you need. This makes it easy for you to check against 1099s when it comes time to tracking income levels, as well as makes it easier on your accountant when you can hand him a breakdown when it comes time for taxes that shows exactly how much you spent and where.
The nice part about being self employed is that you can claim a lot of things normal people can’t. I can’t claim as much these days as I used to be able to, but back in the day when I was running a construction company I was able to claim clothing, a portion of my apartment for an office, my cell phone bill, all of my insurances, all sorts of stuff. As a general rule of thumb I would have around 60k of income and would only pay taxes on 15-20k. In other words, I was generally able to deduct 40 thousand dollars worth of income as the “cost of doing business”.
The more money you make the easier it becomes, as well. There’s a reason why celebrities “own” charities or do things like build houses and dump their money in property. Many is the time I worked on houses up in Vail or Aspen that were 100% tax write-offs for the rich and famous. They build a home for 15 million and turn around and rent it out for the majority of the year, making it a “business” venture rather than simply a private home…even though they use it a few times per year…and thus can write off that 15 million dollars as a legitimate business expense, thus avoiding paying any taxes on it. You can also do things like own 2-3 different businesses and bury the money in various assets between the companies so that your money is tied up in business expenses rather than having to pay taxes with it. It’s complicated, but you can actually keep most of your money tied up in assets as long as you do it by the book and have a good accountant.
Too many people are afraid of the IRS. Don’t be. Hire a good accountant and use the system like it was meant to be used. Don’t be fooled into thinking that you HAVE to pay the maximum.
While TW is basically right, don’t just hand everything to an accountant without asking why certain things are being done the way they are. Otherwise an accountant will do things that are to his advantage, not yours (accrural accounting vs cash accounting). Also, a CPA may not be necessary, but a poor accountant will likely cost you more than a good one who charges more because he or she will make mistakes that could result in costly penalties.
I do my own personal and corporate taxes, but I also worked for H&R Block, have had five semesters of accounting (including a graduate level tax class) and don’t have anything beyond basic expenses, income and depreciation. Most other writers I’ve met would prefer not to deal with numbers, so an accountant is good advice, but it’s still good to have a basic understanding of what he or she is doing.
It’s actually very complicated in this active life to
listen news on TV, therefore I simply use internet for that reason,
and take the most recent information.