Freelancer Tax Tips
If you’re new to the freelancing game or the gig economy, you might not know the lay of the land when it comes to taxes.
Even worse, you might think that you know rules but are completely wrong. Before you put your 1099s together and file your taxes, these are the most important things for you to know.
A brief note about the new Trump tax bill: The tax rate on "pass through" corporations has been lowered, which is even better news for freelancers. In the 21st Century, pass through corporations are no longer for the fabulously wealthy — a full-time Uber driver would benefit from one, as we explain below.
Get an Accountant who Knows Freelance Life
All accountants are not created equally. If you live outside of New York, Los Angeles or San Francisco, you might have a hard time finding someone who specializes in freelancers. But spending a little extra time to do the legwork will pay off. That’s because your accountant has to be able to understand your needs before she can meet them.
Talk to them about what percentage of their client base are freelancers receiving 1099 forms. Are they familiar with your industry? Do they follow a “one-size-fits-all” approach to freelancers or are they going to look at your business and advise you on how best financially to operate it?
You don’t just want an accountant who files your taxes and walks away. You want someone who can act as a sort of unofficial CFO for your business.
If You Get a 1099, You Need to Incorporate
Speaking of business, you need to officially create one. Most of the better tax advantages for freelancers only come into play once you’re a corporation, not a person. We’ll get into these in more detail later.
Incorporating complicates your taxes enormously. You could probably file your taxes on your own after incorporating, but it’s a bad idea.
It’s much better to have an accountant who understands corporate tax law and can help you out. Incorporating isn’t expensive but it will set you back a bit. Most people incorporate in Nevada and Delaware for maximum privacy and tax benefits. Online services can help you do this for a nominal fee.
Look at Yourself as a Business Owner, Not a Freelancer
Once you incorporate you need to stop looking at yourself as a “freelancer” and start looking at yourself as a business owner — because you are.
That means at least part of your working life is going to be dedicated to accounting. You need to track the money coming in, the money going out, keep track of your finances and pay your company’s bills.
You won’t have to spend tons of time tending to your business, but you will have to tend to it. There’s a mindset switch involved here that many people find difficult. Put at least an hour a week doing this into your schedule and then adjust as needed.
Keep Receipts for Absolutely Everything
Stop throwing away receipts, for anything. In fact, the best thing you can do is get an app where you photograph all of your receipts. Those are going to help you out a lot when it comes to tax time.
You need a receipt to make a deduction, at least if you don’t want trouble if you get audited. For a lot of reasons, it’s better to look at your receipts at the end of the year and see what you can deduct rather than tracking what you think you can deduct throughout the year.
If You Would Argue It to the IRS, Deduct It
And while we’re on the subject, you should deduct basically anything you’re willing to stand in front of an IRS agent and argue is a legitimate deduction.
There’s a maybe-apocryphal story of a food writer who deducted every meal she made at home because it was research for her job. No idea if this is true or not — or if she got audited — but it doesn’t really matter. It sounds reasonable that a food writer would constantly be researching food.
Talk to your accountant, but also pick one who views deductions in the broadest manner possible.
Put Everything You Can in Your Company’s Name
It makes sense to put things under your company name. For example, let’s say that you own a car out right — you can transfer that to your company and it counts as “basis” (more on this later). That’s going to have tax benefits when you go to file.
Again, as with all of these tips, you need to make these decisions under the supervision of your accountant, but you wouldn’t be the first person to transfer assets from your personal life to your business life —and the people who do it are doing it for a reason.
Forget a Home Office, Have Your Company Rent the Apartment
One thing that people do when they freelance and work from home is to have a home office. You have to have a room in your house that you only use for the purpose of doing business. You can’t make your kid’s nursery into a home office for a few hours a day and then have it be a nursery again when you’re done.
What you can do, however, is consider having your business rent the apartment. You can’t cut checks from your business to your landlord unless the lease is in your name. You have to make sure all of your bases are covered here. And once again: make sure you discuss this with your accountant before you actually do it.
Keep Your Personal Expenses Separate
Related to the above, your personal expenses need to be kept separate from your business expenses. There needs to be an iron wall between what you spend on yourself for your personal life and what you spend on your business.
Sure, there’s a lot of expenses from your personal life that you can move to your business life. Your accountant can help you to understand where the line gets drawn. But once the line is drawn, everything has to get kept on the right side of the line.
Have a Bank Account, Get a Debit Card
Your business needs a bank account, if only to have a place to deposit all of your checks. You should also have a debit card because it’s going to make tracking your expenses a lot easier. There’s not really any reason to ever pay for anything that your business needs with cash. In fact, the more paper trail you have, the better. A receipt is great. A receipt and a bank record are even better than that.
At the end of the tax year, you can basically just hand your monthly statements over to your account and she can do most of the work from there. If you’re keeping your receipts, you can send those receipts over to your accountant to work from.
The Two Magic Words Are 'Income' and 'Basis'
The two terms you need to be most familiar with when it comes to your business are income and basis.
Put simply, income is any money that goes out (gets paid to you) and basis is any money or valuable goods you put into the business.
Basis has tax advantages and you should discuss it with your accountant to see how to get the most out of any basis you put in.
Remember Self-Employment Tax
There’s a tax on self-employment. It’s basically the payroll tax your employer used to pay when you had a "real" job. Now you’re going to pay it yourself.
While you’re at it, remember that you need to pay your Social Security and Medicare yourself.
There’s not really much way around paying either of those but your self-employment tax can be lowered with the some of the techniques in this article. Again, for a final time: talk to your accountant.
You’re Required to Pay Your Taxes Quarterly
The IRS requires that you pay taxes quarterly on 1099 income, not annually like you might be used to.
You’re supposed to estimate a quarter of what you expect to pay in taxes and send them a check every three months. Make sure that you’re doing this if you want to stay in the good graces of the IRS.
Clients Are Required to Send 1099s, But If They Don’t…
Your clients are required by law to provide you with a 1099 every year. Many of your clients will forget to do this. Some will “forget” year after year.
The good news is that you can write the IRS directly and get a copy of your 1099. While they might not care about you getting your forms on time, they sure care if the IRS gets the proper paperwork.
So if you don’t get a 1099, don’t stress. The IRS already got it and can send you everything you need to file your taxes.
Owing Money Isn’t a Big Deal, Even When It Seems Like a Lot
It’s not at all uncommon for people to owe the IRS, especially their first time out as a freelancer or business owner.
The good news is that you have to owe the IRS a lot before you become a target for aggressive collection efforts. The main thing you need to do to stay on their good side is to pay them. You can do that all at once or you can do it in monthly payments.
There’s no getting out of paying the IRS and despite their reputation for being difficult to deal with, they offer attractively low interest rates and some of the best customer service around. They’re some of the best people to owe money to — provided that you keep up with your payments.
Disclaimer: None of the above is financial advice. All your tax strategies should be discussed with a qualified tax attorney.