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Happy Independence Day! With all the talk of unemployed folks hanging their own shingle as freelancers, I thought it high time we addressed one of the murkiest aspects of working as an independent professional: paying taxes. To help tackle some of the most common questions new freelancers ask, I contacted Bellevue CPA Stephen L. Nelson, who's author of QuickBooks for Dummies. His answers follow.
Q. What can I write off as a business deduction?
A. You can write off any "ordinary and necessary" expense of running your freelance business. It's really that simple. Sometimes, people also find it useful to use a giggle test. You don't want to claim anything that an auditor would laugh at.
Q. How do I pay my taxes?
A. You pay your federal tax bill in four equal chunks over the course of the year. To do this, download the 1040-ES coupon from the IRS Web site. Then fill out that form by adding your name, address, social security number, and payment amount to the coupon. Finally, mail the coupon and your check to the address the coupon provides.
You pay the Washington State excise tax (also known as business and occupation tax) when you file your state excise tax return. If you've gotten your business license (and you should have already done this), the state Department of Revenue will probably send you the annual excise tax return at the end of the year.
Q. How much tax will I owe?
A. For federal taxes, it's a little hard to say. If you're single and don't have other income (including severance income), you may not be subject to income taxes. But you will be subject to the 15.3 percent self-employment tax. (This tax gets levied on the roughly the first $100,000 of freelancing profit.) Probably a good guess, therefore, about how much federal tax you owe is 20 percent of your profit.
If you're freelancing in Washington State, you also owe a 1.5 percent excise tax on your revenue. And local cities also often ding you another few hundred bucks.
Q. Can I take the home office deduction?
A. If you use some chunk of your home regularly and exclusively for your freelancing business, you can take the home office deduction if your freelancing business is making money. Don't worry about being audited. But note that the home office deduction saves renters more money that it saves homeowners.
Q. Can I deduct my health insurance?
A. If you're self-employed, you can deduct the health insurance premiums you pay. Note, though, that you can't deduct more health insurance costs that your business makes.
Q. How much 1099 income do I have to earn before I owe taxes?
A. If you get a 1099 form, you need to report your business income (by using Schedule C inside your 1040 return) if only to show the IRS that you didn't actually make much profit. The tax you owe on your 1099 income will probably equal 20 percent or so of your profit.
Q. What should I do if a client doesn't send me a 1099?
A. Don't worry about not getting a 1099. That's your client's problem, not yours. But do note that you still need to claim the income.
Q. Can I deduct unpaid time I spend working on my blog, website, or marketing materials?
A. Nope. But you're not losing anything by not claiming this deduction.
Freelance writer Michelle Goodman is the author of "My So-Called Freelance Life" and "The Anti 9-to-5 Guide." E-mail her at ninetothrive@nwjobs.com.
By kirklandsam on July 9, 2009 1:51 PM
not subject to federal income tax at $100K? Only allow 20% for estimated taxes?? This is incorrect... This will depend on how much deductions you have...
Do not follow this or you'll be sorry.
By Stephen L. Nelson, CPA on July 13, 2009 10:39 AM
I think my numbers are right. First, many people freelancing won't pay much income taxes. A single person making $10K in freelancing but no other income won't pay any income tax, for example. And a single parent with a couple of kids and $20K in mortgage/property taxes won't pay any income taxes either once you include things like the child tax credit and the self-employment tax adjustment..
Second, I think the 20% "guesstimate" is a better rule of thumb that you might think. For example, reusing the example of a single parent with a couple of kids and a $20K mortgage, when I run that person through my tax software, I come up with a total tax bill of $22K ($14K self-employment tax and $8K income taxes). Note that if this person can come up with any business deductions (home office, computer, etc), they'll quickly drop their tax bill down below 20%.
By CPA Tucson on November 8, 2009 5:06 PM
A tax benefit to working freelance is that it puts you in charge of your tax situation.
A basic strategy is to reduce your taxable income, move taxable income into nontaxable income, and take advantage of tax credits.
Working freelance allows you more control and opportunities to influence your amount of taxable income.