Becoming a Savvy Taxpayer: Decisions, Deductions, and Deadlines

Facilitated by Suzy Bills

Listen to the recording!

General Tips

  • gov has tons of information. The info is generally easy to understand and clearer than what is included in tax forms and accompanying instruction..
  • If you’re doing just a little bit of freelancing in addition to a full-time job, you could probably prepare your tax return on your own. But as you take on more work and things get more complex, hiring a tax preparer is a good idea.
  • Hiring a tax preparer is tax deductible. Tax preparers know all the things you can deduct, reducing your tax liability.
  • Open a checking account and credit card account that are just for business/freelance work (expenses and income). Doing so keeps a clear line between business expenses and personal expenses. You can pay yourself from your checking account, transferring money to your personal account. (Bonus: A lot of banks offer incentives, like free $100 when you open account.)
  • Save all receipts! If you have your own checking account, you’re sort of already doing that, but receipts show the itemization.
    • Really important if you’re audited. You most likely won’t be, but you need to be prepared.
    • Programs for saving receipts:
  • Shoeboxed is free.
  • Evernote and Scanable are other options.
  • Most important it to find a program that helps you stay organized.
  • Look into other programs for streamlining your other processes
    • Maybe as basic as an Excel sheet: income, business expenses for the month
    • Online programs: Wave, etc.
    • Try out a few systems to find one that works for you—one you will actually use.

Type of Business

  • Sole proprietor
    • Most common for freelancers without employees. It’s easiest to start with.
    • Don’t have to file any paperwork to be a sole proprietor.
    • Do still need a business license from your city/county.
    • No threshold for when you need to get a business license—anytime someone is paying you for work, you need a business license.
    • File taxes as individual.
    • Downside: You incur all liability from business. No protection between your business and yourself. (Fortunately, publishing doesn’t face this very often.
  • LLC (limited liability company)
    • Around $500 to file in state you’ll be working in.
    • Personal liability is limited.
    • More record keeping required.
    • Can file taxes as individual or corporation.
  • S-corp
    • File paperwork to become LLC, then file a form with the IRS to be considered an S-corp.
    • Limited personal liability
    • Pay less self-employment tax.
    • If you’re bringing in monthly income from freelancing, consider becoming an S-corp. You can save money that way.
    • Deductions
  • Get creative—not in a dishonest way, but think about all expenses that apply to your business. Some examples:
    • Marketing/advertising, including business cards
    • Banking fees
    • Health insurance (if not subsidized by an employer)
    • Computer, printer, other biz equipment, materials, computer programs
    • Professional conferences, meetings, associations, training (including transportation)
    • Home office—desk (including standing desk, treadmill desk, bike—if you’re using them for your work, they’re part of your business), chair, desk phone, etc. The office has to be set aside for your business work. Can’t be your couch if you also watch TV there.
    • Phone and Internet service
    • Website (design, domain, etc.)
    • Business trips (meals, transportation, etc.)—presentations, speaking commitments, meeting
    • Meals and entertainment with clients (50% of total deductible)
    • Accounting fees
    • Tax preparation fees
  • Deductibles are not dollar-for-dollar, but you’re reducing amount you owe.

Self-Employment Tax

  • Goes toward Medicare and Social Security.
  • 2016: 15.3% of income.
  • 50% of what you pay in self-employment tax is deductible on Form 1040.
  • There are online calculators for self-employment tax (e.g., com).

Quarterly Taxes

  • Pay quarterly tax if estimated tax liability is $1,000 or more after all other withholdings. Use the previous year’s tax liability to estimate.
  • Quarterly payments due April 15, June 15, September 15, and January 15 of following year
  • If you don’t pay quarterly and you owe taxes at the end of the year, you may have to pay a penalty.
  • Again, you can use an online calculator.
  • Use Form 1040 ES for quarterly taxes (4 vouchers—1 for each quarterly payment).
  • Paying quarterly is fairly simple once you get used to it. Set a reminder for yourself in your calendar, maybe the first of the month that a payment is due.
  • If your freelance income is variable, just pay more during the quarters in which you earned more. You can annualize your taxes (fill out form 2210) to explain why payment amounts varied.
  • If you’re not making that much but your spouse is employed full-time somewhere, you can actually just have a little more withheld from his/her paycheck instead of you paying quarterly taxes.
  • It’s ideal to break even on taxes—not getting a refund so that you’re giving the government an interest-free loan.