Self-employment tax help for out-of-state web work

February 24, 2009 4:16 PM

Self-employment tax help for out-of-state web work

In late 2007, I moved from Ohio to San Francisco, leaving my full-time web-related job. In early 2008, the company I left started tossing freelance work my way. Lots of freelance work. So much that I never even needed to find local clients.

Questions:
1) Will I have to file an Ohio income tax form because the company paying me is located there? What about the city where the company is? (Yes, when I lived in Ohio we had city-level tax forms to file. I mentioned this to a SF resident once and it surprised them)

2) I'm assuming that I have to file a California income tax form since I live here, but are there any laws that say, for example, if the higher income tax state only gets the difference between the two rates? Or anything else pertinent?

Notes:
a. I have not been keeping up with estimated quarterly payments. Yeah, I know that's not really smart. I'd never intended to be a full-time freelancer. If I wasn't in the sweet situation of getting a steady stream of work from a company I was at for a decade, I don't think I'd have the temperament for it.

b. If it matters, we're talking about $73K of 1099 income.

posted by anonymous to work & money (9 comments total)

Here's my experience:

you pay taxes for where you live and for where the company who sends you money physically exists (usually the address on their checks). last year i lived and worked in nyc and did out of state freelance and then moved to a nearby state. it's my understanding that i have to pay partial taxes this year in NYC, in NY State, in My New State, in The State Where My Freelance's Main Office Is and for Federal.
posted by judge.mentok.the.mindtaker at 4:35 PM on February 24

I should mention, i don't know how you work out the breakdown, which is why i am hiring an accountant this year.
posted by judge.mentok.the.mindtaker at 4:40 PM on February 24

judge.mentok.the.mindtaker: Does that mean these people are wrong? They claim you only have to pay freelance taxes to the state you're physically located in while you're doing the freelance work. (Of course, it is an off-brand Q&A site, so it would be understandable if they were wrong...)
posted by limeonaire at 4:42 PM on February 24

1. I would expect not, unless Ohio is very evil. Please note that NY, which judge mentok mentions, is very evil; if you work from home for a NY employer and visit that employer's office for essentially any length of time, they claim taxes on your entire year's income. But I don't know if that would apply in a freelance situation, or whether Ohio has anything similar...

2. If you do have to pay Ohio for some reason, California has a credit for income tax paid to another state, so you don't get taxed twice on the same income; the form you'd need is schedule S.
posted by equalpants at 5:03 PM on February 24

I think mentok is wrong. I'm a freelancer who does work for clients in NY. (I am in TX, which has no state income tax, but then again, has shitty social services and sky-high property taxes. Digression. Sorry.) As far as I know (and I've been freelancing for about 20 years), I'm not obliged to pay NY taxes.

It is possible that the IRS will notice that a disproportionate share of your income is coming from one client and decide that hey, you're not a freelancer after all. The negative repercussions from this will redound to your client, not you, as they will be perceived as trying to skirt FICA contributions. You might want to drum up some other clients if for no other reason than to avoid putting your best client in a position where maybe they can't work with you anymore. Also, as long as you are a freelancer, it never hurts to distribute your eggs among multiple baskets.

I would recommend seeing a tax guy, because taxes are more complicated for freelancers and you might be missing other stuff.
posted by adamrice at 5:08 PM on February 24

You only have to pay taxes in the state that you work in. If you paid for two different states at the same time, then you should file a revised return. You will also have to file local taxes for the place that you work.

I would DEFINITELY get a tax professional to help you file your return and do it RIGHT NOW. Between the federal, state, and local taxes, you are likely going to owe a lot of money. I would say at least $20,000. That would be a pretty low number. I would start planning now so that you will be able to pay it by the April 15th deadline.
posted by jefeweiss at 5:09 PM on February 24

I'm glad to find out i'm (somewhat) wrong and probably don't have to pay taxes on the out of state freelance. still totally getting an accountant.
posted by judge.mentok.the.mindtaker at 5:13 PM on February 24

I've never lived in the state I worked in. I've always had to fill out state income taxes for two states. This is is for both 1040 and 1099. If I recall, I get some money from one of the states back, so it is not as if I'm getting hit all over the place, the net loss is usually a couple hundred dollars.

I would also like to echo others in saying that you should take on other clients to keep your status as freelance.
posted by geoff. at 7:36 PM on February 24

If you're filing as a freelancer, you only have to pay taxes in the state you live in. If you are an employee and your company is in a different state than the one you live in, you pay taxes in both states.

Nth-ing the suggestion to let an accountant specializing in freelancers file your taxes -- they find all the good deductions that you can take and probably haven't realized. It's the best decision I ever made!
posted by lgandme0717 at 7:03 AM on February 25