Find Your Way Through the Tax-Time Maze: 12 Tips for Freelancers

Working for yourself, either full-time or as a moonlighter, has many advantages as well as a few disadvantages. To make the most out of your freelancer status you need to educate yourself. You need to know the rules. You need light shed on the confusion.

By learning more about the tax and financial side of your creative ventures, you can walk with confidence through the maze of tax regulation and IRS jargon that, without guidance, can send you to a dead-end.  

To get started, let’s clear up what you are. If you are offering your services or product to the public, not to one client, with the goal of making a profit, then you are a self-employed person in business. The IRS calls you an independent contractor. I call you an indie. Read I Am A Business  to learn more. The tips below are meant to be a light to help guide you through the maze:

1. The Same, Yet Different

A self-employed person pays the same federal taxes as does every other working person. They are income tax, Social Security tax and Medicare Tax. For indies, Social Security tax and Medicare tax are merged as Self-employment (SE) tax. An indie pays both the employer’s share and the employee’s share of SE tax. However, the indie deducts the employer’s share as an expense.

2. Kiss That 40% Goodbye

Plan on about 30% to 40% of your net self-employed income going toward taxes. That’s 15% to SE tax; plus 15% to federal income tax; plus 10% state tax. These could be higher. Or, could be lower. Therefore, a $1,000 profit on a project means only $600 in your pocket. The other $400 will go to Uncle Sam and his state cousins.

3. Don’t Hide Income

It’s fraud. And also, when you say to a client, “I’ll charge 20% less if you pay me cash,” he knows you’re not really a legitimate business. And he’ll treat you as such. Be a real professional.

4.  Take it to The Limit

To reduce your income take every possible legitimate business expense. Do this by reviewing everything you spent money on throughout the year. A visual artist — consider a Netflix deduction. A copywriter — what about an additional home office deduction for the kitchen corner used exclusively for writing while keeping an eye on dinner? A simple method of doing that is explained in The Confident Indie Keeps Awesome Records: Five Easy Steps.

If you’re paying a combined tax rate of 30% to 40%, then every $100 deduction could save you $30 to $40 in taxes. And, keep in mind, your loss can be deducted from other income, such as yours or your spouse’s wages or investment income. For a complimentary list of more than 100 typical and atypical business expenses, visit my site at 100+ Business Expenses To Help Reduce Your Taxes

5.  Wider is Better

Define your business as broadly as possible. The more broadly defined, the more eligible deductions you’ll have. For instance, a generalist writer typically has more expenses than does a technical writer.

6. Business is Business

Look at the possible business connection of all your activities. If while driving to mom’s house you deliver your proposal to a client, even though they were both on the same route that part of the drive is deducible business mileage.

7. Check Your Relationships

Just because it was your girlfriend who fixed your printer, your thank-you-dinner is still a business deduction. That she’s your girlfriend does not negate the business activity for which you are thanking her. Be sure to check out Designers Dozen: Tax Saving Tips For The Graphic Artist to learn more about this approach to expenses.

8. More into Your “Freedom” Account Means Less Tax

Your pension can be your freedom account. Not only does a contribution to your pension defer your tax now, but the saved money gives you the choice, at any age, to make a change or deal with an emergency.

There are many pension plans available for indies. From the good old IRA to the complex Defined Benefit. I recommend the most flexible and simple that allows the biggest contribution. It’s the UNI-k. Also known as the SOLO-k or One-person 401-k. And for your 2011 tax return you have until October 15, 2012 to make a contribution for most pension plans? Which leads to my next ray of light.

9. Haste Makes Waste and Often Makes for Bad Financial Decisions

File an extension. Don’t rush to get your return complete and filed by April 15, 2012. You can get it all together by that first filing deadline, but as an indie-savvy tax pro knows, there are choices of tax treatment on your return. Perhaps a really good 2012 or a really bad one may change the way something is handled on your 2011 tax return. And you won’t know about 2012 until you’re a ways into it. Want to know more? Tax deadline … Relax … File in October instead of in April.

10. It’s Not a Chore; It’s a Process

For an indie, taxes should not be a job to do on April 15. It is a process that is ongoing, and includes your total tax and financial situation. You will be better able to make decisions throughout the year be they whether to buy a new iPad or skip this quarter’s estimated tax payment. Stress will be reduced and confidence will grow because you’ll have no big, bad surprise come April. You might want to read Estimated Tax Payments: Shouldn’t scare the bejesus out of you.

11. What Daddy’s Accountant Doesn’t Know

Use an indie-savvy tax professional. Daddy’s accountant may understand stock options but he doesn’t understand the vagaries and special circumstances of a creative freelancer’s business. Looking for a tax pro? Read this first Two Parts To Finding The Tax Professional Right For You.

12.  A Loss Doesn’t Mean You’re a Loser

IRS says: “If you show a profit in three out of five years you are a business.” Someone may have told you — maybe it was your tax adviser or even Aunt Tillie — that your indie pursuit must show a profit three out of five years for the IRS to consider it a legitimate business. That is wrong. Much more info here: There is no limit on the # of years you may have a loss in your self-employed business.

 Even though there are more than 40 million self-employed Americans, many people still believe that working for yourself isn’t “a real job.” But confident indies know that the path they have chosen has real risks as well as real opportunities. It is real work. You are a real business. Learn about it. Enjoy it. Prosper from it.  Read 7 Advantages Of Self-employment.

2 thoughts on “Find Your Way Through the Tax-Time Maze: 12 Tips for Freelancers

  1. theboyjwo

    I wish there was more on here about how a moonlighter would handle freelance income that is additional to their full time gig. Most moonlighters aren’t going to pay bother paying any sort of quaterly tax payments as they have no real way to accurate estimate it.

  2. June Walker Post author

    A moonlighter or full-time self-employed handle and calculate estimated taxes the same way. In either case, estimated taxes are determined by your ENTIRE tax situation. That means that if you or your spouse has a W2 job making $40,000 a year, whether you have $20,000 income from a freelance endeavor or income from grandma’s trust fund that gets you $20,000 a year you need to calculate estimated payments including all the income in your calculation estimate.

    My two posts Estimated Tax: Your Fair Share: How much should I pay?
    Estimated Tax Payments: Shouldn’t scare the bejesus out of you.
    will give you some insight on how to do the calculation.

    June Walker