By: Tamara Rice
It's that time of year: Taxes. Taxes. Taxes. If you just began freelancing in 2009, the next few months seem a little crazy for you - filing self-employment taxes for the first time can be stressful! Even those who have been self-employed for years might appreciate a little guidance Here are a few tips to help you out.
FREELANCE TAX TIPS FOR THE SELF-EMPLOYED
♦ Consider having your taxes done by a professional. Math isn't your thing? The IRS confuses you? Welcome to the club! Consider the benefits of having a reliable (and knowledgeable) accountant do your taxes for you. It might be the best investment you make all year.
♦ If you can't afford professional help, try a computer program. It's the next best thing to an accountant, and it can be affordable. Not sure which program to use? Check out this post that compares 2009 TurboTax to H&R Block at Home. Don't forget to save your receipt for purchasing the software -- it's a write-off!
♦ Start now. "But I always did my own taxes when I was a regular employee," some newbies might be saying. "I don't need a computer program, and I don't need an accountant." Maybe you don't. You do, however, need to realize that self-employment taxes are a whole different ball game from the 1040EZ form you're used to. If you go it alone, start now, so you have plenty of time to figure things out. (And plenty of time to get help if you need it!)
♦ Collect your 1099-MISC's carefully. Any client who paid you more than $600 in 2009 is required by the IRS to mail you a 1099-MISC form by February 1, 2010. It's important that you know who owes you a 1099-MISC and that you collect those forms from them. Clients who paid you less than $600 are not required to give documentation, but you are still required to report the income. Go over bank records if you have not kept careful track, but know who paid you and how much.
♦ Report your income accurately. The IRS is watching. Reporting an income on your 1040 that is lower than the total amount of all your 1099-MISC's will spell A-U-D-I-T for you.
♦ Designate office space.If you work from home, instead of renting an office space, you can usually deduct the expenses of your home office. Having a certain room of the house that is designated as your office helps. Measure it against the total square footage of your home or apartment so you know what percentage of utilities, homeowner's insurance, etc. to apply to that space. There are limits, however. Consult Publication 587 to learn more about home office laws and limitations in tax year 2009.
♦ Save every receipt.Did you buy coffee while you were working from the corner coffee shop? Write it off. But don't go overboard with this practice. The IRS is wary of self-employed individuals and their write-offs, so make sure it's legit. Potential expenses for which you'll need a receipt:
- office supplies
- computer/laptop/fax machine
- business travel, working meals
- books and subscriptions (websites, magazines, trade papers) related to your work
- repairs to home office (including air conditioning and heat) or computer, phone, etc.
- business cards, letterhead, etc.
- work-related legal and/or accounting expenses
♦ Save every bill.Whether it's Internet access or your cell phone, if it's related to your work, you will need the proof of your business expenses in order to write it off. However, be cautious about writing off the entire amount of each expense. For example, if you also use your cell phone for personal use, take that into consideration, and write off the percentage that was business-related.
- Internet access
- cell phone or telephone plan
- home office utilities
- real estate tax (home office)
- home owners insurance (home office)
♦ Always have proof of your business expenses. We said save receipts, we said save bills. Why are we driving this point home? Because you might be thinking, "Hey, I think I remember how much it was and when it was. I'll just make a guess and go for it." Bad idea. You need proof. Consult debit and credit card bills if you have to, because you really do need that paper trail.
♦ Keep track of medical expenses.Your medical expenses and/or the premiums of your health insurance may be deductible, depending on whether or not you pay out of pocket and whether or not your business had a profit this year. Examine (carefully) Publication 502.
♦ Make estimated tax payments during the year. Paying one lump sum a year to the IRS may not work for you. If you struggle with saving--or if the IRS tells you to--pay estimated taxes throughout the year. Note: If you are new to this, it's a simple process. This 1040-ES Form will help you figure estimated payments for 2010.
♦ Be aware of the 3 out of 5 rule. The IRS expects the self-employed to make a profit at least 3 of every 5 years. If you aren't, your yearly losses and continuation of your self-employment venture may raise red flags that lead to an audit. Does this mean you should lie to make it look like you have a profit if you don't? No. But if you are fudging numbers to lower your profit (and thereby decreasing your taxes) you should know you'll probably get caught.
♦ Don't get scammed. No matter who you are, don't trust accountants that haven't been recommended by someone whose opinion you trust. Don't open or respond to e-mails that claim to be from the IRS. Crooked accountants are out there, and the IRS does not use email to contact taxpayers. Remember those two facts and protect your personal information.
OTHER FREELANCE TAX POSTS WORTH READING:
- "Freelance Writing Business Tax Tips" from Inkwell Editorial - These tips are timely for 2010 and insightful -- plus, you don't need to be a writer to appreciate them.
- "Health Insurance Deductions" from June Walker Online - June Walker offers tax advice to the self-employed every day of the year. Send her your questions and check out this post on health insurance.
- "IRS 2010 Calendar" from IRS.gov - This colorful little pdf just might make 2010's taxes a little easier for the self-employed.
- "Tax Tips for Freelance Professionals" at About.com - This article gives a lot of detail, and gives special attention to creative professionals.
- "Tax Deductions for Freelancers" at Freelance Directory - Walk through the routine moments of your job to figure out what is a deduction and what isn't.
- "10 Tax Deductions for Freelancers" at Freelance Switch - You may find a few here you haven't thought of before (like monthly dues to access those "members only" job boards).