Preparing to pay taxes as a freelancer
July 13, 2014 11:35 AM Subscribe
I’ve just started freelancing as a copywriter and have some questions about preparing to pay taxes, and what I can claim as expenses.
I’m in New York City and I work in the client’s office full-time as an independent contractor. What I can claim as deductible expenses, and what receipts I should be keeping as a result?
For instance, can I deduct:
- Monthly MetroCard
- Website hosting for my portfolio site
- Business cards (don’t actually have these printed yet)
I use their computer, Internet, and office supplies, but is there anything else I should be thinking about?
Bonus question: is there any advantage to paying quarterly taxes rather than yearly, other than avoiding one big bill at once? This is my first client so far, but once this contract ends I hope to continue freelancing, just FYI. I realize that April 15 is a ways away but I want to make sure I'm doing this right from the beginning.
I’m in New York City and I work in the client’s office full-time as an independent contractor. What I can claim as deductible expenses, and what receipts I should be keeping as a result?
For instance, can I deduct:
- Monthly MetroCard
- Website hosting for my portfolio site
- Business cards (don’t actually have these printed yet)
I use their computer, Internet, and office supplies, but is there anything else I should be thinking about?
Bonus question: is there any advantage to paying quarterly taxes rather than yearly, other than avoiding one big bill at once? This is my first client so far, but once this contract ends I hope to continue freelancing, just FYI. I realize that April 15 is a ways away but I want to make sure I'm doing this right from the beginning.
Even if you don't pay quarterly taxes, if you don't have a savings buffer, it is a good idea (as in, "do this or you are fucked") to put your 15% aside as you get paid. If it's your first time freelancing it adds up to a LOT more than you expect, especially if you're accustomed to having taxes taken out or getting refunds (lol).
posted by dekathelon at 12:03 PM on July 13, 2014
posted by dekathelon at 12:03 PM on July 13, 2014
Paying quarterly is required unless you want to pay a penalty....but yes, you might want to clarify with the IRS if you're actually an employee under the law.
posted by three_red_balloons at 12:08 PM on July 13, 2014
posted by three_red_balloons at 12:08 PM on July 13, 2014
Since you do all of your work for the client at their office, using their space and materials, the IRS may consider you to be an "employee" rather than an "independent contractor". This article explains the difference, which is admittedly difficult to determine in many instances, as well as any. If you are, indeed, what the IRS would consider an employee instead of an independent contractor, it is the business that will be in hot water, not you.
Because you are categorized by your client as an independent contractor, you are liable for self-employment taxes. This is a fancy term for the social security and medicare tax that are normally withheld from the paychecks of employees and the employer pays an equal amount. As a contractor, you are liable for both the employee and the employer portion of the tax, basically double what you would pay as an employee.
The IRS will expect you to deposit your withholding on a quarterly basis and, unless you want to go through extensive calculations, in equal amounts. Please note, though, that the quarterly deposits are not due every quarter. That would make just too much sense. Rather, they are due in January, April, June, and September.
Since you intend on being a freelancer for the foreseeable future, I think it would be a very good idea to consult with an accountant to make sure you're doing everything absolutely correctly and establishing a routine that will keep you out of trouble with the IRS.
posted by DrGail at 12:14 PM on July 13, 2014 [3 favorites]
Because you are categorized by your client as an independent contractor, you are liable for self-employment taxes. This is a fancy term for the social security and medicare tax that are normally withheld from the paychecks of employees and the employer pays an equal amount. As a contractor, you are liable for both the employee and the employer portion of the tax, basically double what you would pay as an employee.
The IRS will expect you to deposit your withholding on a quarterly basis and, unless you want to go through extensive calculations, in equal amounts. Please note, though, that the quarterly deposits are not due every quarter. That would make just too much sense. Rather, they are due in January, April, June, and September.
Since you intend on being a freelancer for the foreseeable future, I think it would be a very good idea to consult with an accountant to make sure you're doing everything absolutely correctly and establishing a routine that will keep you out of trouble with the IRS.
posted by DrGail at 12:14 PM on July 13, 2014 [3 favorites]
P.S. Here's a little more info on the independent contractor vs employee situation. Sometimes businesses improperly classify you. There's a tax advantage for you to being considered an employee. Of course, you may not want to get your client/employer in trouble with the IRS, but it's worth knowing...
posted by three_red_balloons at 12:15 PM on July 13, 2014 [1 favorite]
posted by three_red_balloons at 12:15 PM on July 13, 2014 [1 favorite]
Right now, you only have one client, and while everyone advising you to VERIFY whether you are an employee or contractor is giving valid counsel, my advice is going to based on the supposition that since you're just starting, eventually (ostensibly) you will have multiple clients during the course of the year. Indeed, and hopefully, you may sometimes have multiple clients concurrently, and because sometimes you will be working at a client's site does not mean that you will not be able to take a home office deduction, because (again, ostensibly) you are doing other business activities from your home base, including bookkeeping, marketing, networking and other basic administrivia. If you are truly a 1099 independent contractor for IRS purposes, then your office (even if it's a corner of your kitchen) is your base of operations.
So, #1, figure out whether you are an employee, in which case only unreimbursed business expenses as an employee will be deductible, or a business owner. As a freelancer anticipating having other clients, the latter is at least likely. Based on your additional comment in the thread, it's even more so.
I encourage you to start with the IRS page explaining deducting business expenses in various categories.
If you use your Metro Card for business as well as personal expenses, it would be similar to how a professional using a car would have to differentiate between business miles and personal miles driven. If you consider your home office as your home base, travel to clients counts as business travel. As a professional organizer, I often help clients maintain and gather their expense information for completing their taxes, but use of public transportation (outside of business travel/conferences) has been applicable. I'd advise you to consider getting two separate Metro Cards, one for personal use and one for business use, label them so you don't use the wrong one for the wrong purpose, and keep a daily/weekly log so these expenses will be easy to quantify.
You may use their internet when you are doing work for them, but if you are using internet at home for promoting your business (working on your web site, for social media, etc.), the percentage of your internet costs used for business activities will likely be deductible. So be sure to pay attention to what you're doing to complete the client work at the client location vs. what you're doing to RUN your business when you are not at the client location. In the beginning, it's easy to focus on the client because it's the only client you have, but you need to see this client as your FIRST client FOR YOUR BUSINESS. If your client fired you tomorrow, or you completed the assignment tomorrow, you would still exist.
(Side note: do find out if you need a business license. Some cities/counties require them; some, shockingly, do not. I have a service-based business, do nothing but administrative work in my home office, but need a business license from my county and another from my city. Don't guess. Do the Googling. Chances are that you will owe city/county business taxes as well as federal and state income taxes.)
Anything you acquire for the promotion of your business (like the printing of business cards, the monthly hosting fee for your web site, the web design costs for your site, etc.) are considered valid business expenses -- indeed, those are easy to categorize under marketing. Assuming you're a sole proprietor, you'll be putting your expenses on a Schedule C (esp. lines 8-27), so pull that up to see what kinds of expenses are valid. I think you'll be pleased to see how much you can deduct. (Just don't think you can get away with deducting your lunch costs.)
Other expenses, like joining networking groups to help you get clients, will also be deductible. As of this minute, make sure you keep track of all the money you spend on things that are related to the business. (OK, not nicer clothes so you don't look like a schlump at a networking event, but tickets to go to a lunch & learn networking event.)
Quarterly estimated taxes aren't optional, they're required -- once you're making money. It's just that if if this is your first year, you probably won't need to stress *too* much about paying quarterly taxes. It's important to do, but most freelancers in your situation in their first gig (as writers, in particular) aren't going to end up owing 110% of their prior year's taxes, which is where the fines come in. I'm not saying don't take taxes seriously, but when you've first started a business, especially mid-year, you don't have a sense of how much your income will be, and thus how much tax you will owe compared to last year. If you were employed last year, or even part of this year, for example, and had taxes taken out of your paychecks, and this year have made mostly diddly squat, for example, you want to make sure you aren't paying out a ridiculous amount in quarterly estimated taxes, only to have to wait to get it back next year. Pull up Turbotax and enter some quick figures to get a sense of your situation.
Remember, if you are seeking clients, then you are a business. Treat it like one. Get a business license if applicable where you live. Track your expenses. (Mint or a spreadsheet will be fine in the beginning.) Track your income. Put aside money for taxes out of each invoice payment. 15% is a good rule of thumb, as dekathalon noted, and it might be helpful to transfer it immediately to a separate account or sub-account so you don't accidentally spend into it. The tax money does not belong to you -- you're just holding it for The Man.
Good luck.
posted by The Wrong Kind of Cheese at 12:41 PM on July 13, 2014 [4 favorites]
So, #1, figure out whether you are an employee, in which case only unreimbursed business expenses as an employee will be deductible, or a business owner. As a freelancer anticipating having other clients, the latter is at least likely. Based on your additional comment in the thread, it's even more so.
I encourage you to start with the IRS page explaining deducting business expenses in various categories.
If you use your Metro Card for business as well as personal expenses, it would be similar to how a professional using a car would have to differentiate between business miles and personal miles driven. If you consider your home office as your home base, travel to clients counts as business travel. As a professional organizer, I often help clients maintain and gather their expense information for completing their taxes, but use of public transportation (outside of business travel/conferences) has been applicable. I'd advise you to consider getting two separate Metro Cards, one for personal use and one for business use, label them so you don't use the wrong one for the wrong purpose, and keep a daily/weekly log so these expenses will be easy to quantify.
You may use their internet when you are doing work for them, but if you are using internet at home for promoting your business (working on your web site, for social media, etc.), the percentage of your internet costs used for business activities will likely be deductible. So be sure to pay attention to what you're doing to complete the client work at the client location vs. what you're doing to RUN your business when you are not at the client location. In the beginning, it's easy to focus on the client because it's the only client you have, but you need to see this client as your FIRST client FOR YOUR BUSINESS. If your client fired you tomorrow, or you completed the assignment tomorrow, you would still exist.
(Side note: do find out if you need a business license. Some cities/counties require them; some, shockingly, do not. I have a service-based business, do nothing but administrative work in my home office, but need a business license from my county and another from my city. Don't guess. Do the Googling. Chances are that you will owe city/county business taxes as well as federal and state income taxes.)
Anything you acquire for the promotion of your business (like the printing of business cards, the monthly hosting fee for your web site, the web design costs for your site, etc.) are considered valid business expenses -- indeed, those are easy to categorize under marketing. Assuming you're a sole proprietor, you'll be putting your expenses on a Schedule C (esp. lines 8-27), so pull that up to see what kinds of expenses are valid. I think you'll be pleased to see how much you can deduct. (Just don't think you can get away with deducting your lunch costs.)
Other expenses, like joining networking groups to help you get clients, will also be deductible. As of this minute, make sure you keep track of all the money you spend on things that are related to the business. (OK, not nicer clothes so you don't look like a schlump at a networking event, but tickets to go to a lunch & learn networking event.)
Quarterly estimated taxes aren't optional, they're required -- once you're making money. It's just that if if this is your first year, you probably won't need to stress *too* much about paying quarterly taxes. It's important to do, but most freelancers in your situation in their first gig (as writers, in particular) aren't going to end up owing 110% of their prior year's taxes, which is where the fines come in. I'm not saying don't take taxes seriously, but when you've first started a business, especially mid-year, you don't have a sense of how much your income will be, and thus how much tax you will owe compared to last year. If you were employed last year, or even part of this year, for example, and had taxes taken out of your paychecks, and this year have made mostly diddly squat, for example, you want to make sure you aren't paying out a ridiculous amount in quarterly estimated taxes, only to have to wait to get it back next year. Pull up Turbotax and enter some quick figures to get a sense of your situation.
Remember, if you are seeking clients, then you are a business. Treat it like one. Get a business license if applicable where you live. Track your expenses. (Mint or a spreadsheet will be fine in the beginning.) Track your income. Put aside money for taxes out of each invoice payment. 15% is a good rule of thumb, as dekathalon noted, and it might be helpful to transfer it immediately to a separate account or sub-account so you don't accidentally spend into it. The tax money does not belong to you -- you're just holding it for The Man.
Good luck.
posted by The Wrong Kind of Cheese at 12:41 PM on July 13, 2014 [4 favorites]
My advice is to get an accountant to help if you are truly going to be a 1099 for a long period of time. They are worth more than their weight in gold to make sure something doesn't go wrong. And if something does then they are even more.important.
posted by Carillon at 1:46 PM on July 13, 2014 [2 favorites]
posted by Carillon at 1:46 PM on July 13, 2014 [2 favorites]
I don't have time for a long explanation, so I'm just going to say I totally, wholeheartedly recommend The Confident Indie and The Confident Indie Keeps Good Records by June Walker.
I prefer the PDF versions available from her website.
These totally saved me this year when I learned I not only needed to file taxes as self-employed for last year, but to redo them for the three prior years. Her books helped me turn a nightmare into something that I could quickly and easily do, but that I really am comfortable moving forward with and expanding my self-employed business and know I can do the taxes myself.
These are written with the intention of helping the self-employed person gather, keep, and organize what is needed for a simple hand-off to their tax preparer, but my situation is clear-cut and I'm already very comfortable with doing my own (non-self-employed) taxes.
posted by stormyteal at 3:08 PM on July 13, 2014
I prefer the PDF versions available from her website.
These totally saved me this year when I learned I not only needed to file taxes as self-employed for last year, but to redo them for the three prior years. Her books helped me turn a nightmare into something that I could quickly and easily do, but that I really am comfortable moving forward with and expanding my self-employed business and know I can do the taxes myself.
These are written with the intention of helping the self-employed person gather, keep, and organize what is needed for a simple hand-off to their tax preparer, but my situation is clear-cut and I'm already very comfortable with doing my own (non-self-employed) taxes.
posted by stormyteal at 3:08 PM on July 13, 2014
Having co-owned a couple of businesses I highly reccommend an accountant. They saved us much more money than they cost and you are insured against an audit which is alone worth the expense. Further, they know how businesses fail and how they succeed. Your accountant has an interest in your success and they, in my experience, are more than happy to answer questions. I am not an accountant.
If I ever start a business again my first visit is to an accountant.
Or what Carillon said.
posted by vapidave at 3:16 PM on July 13, 2014
If I ever start a business again my first visit is to an accountant.
Or what Carillon said.
posted by vapidave at 3:16 PM on July 13, 2014
As others have mentioned, whether you're properly classified as an independent contractor or an employee is a nuanced, multi-factor analysis. However, the reality of it is that if you don't want to burn a bridge with this client, you will need to accept/agree with their classification. Since you seem to want to continue freelancing and take on multiple clients, this is not an issue.
In order to deduct your Metrocard expense, you'll need to set up a home office. In NYC, this is difficult because you likely don't have an extra room to designate as your "office." I have set up a desk in the corner of my living room; I use that corner for work exclusively (i.e. I only do work at that desk, no other activities, though I work elsewhere in addition); my "office" is 5 sq ft. Doing administrative tasks from that area would be work. The IRS has a new safe harbor home office deduction that is really simple to use and is based on square footage. The reason you need a home office to deduct the Metrocard is that commuting is not deductible, regardless of whether you are self employed or non-self employed. However, travel between two "business locations" is (generally) deductible.
Any items you use exclusively for your business will generally be deductible. Things used for business and personal use may be deductible to the extent of the business use. Save receipts for everything you use related to your business - credit card statements are not sufficient.
You can pay quarterly (you will likely not be required to do so until tax year 2015, but it's a good thing to start doing); you can actually pay more often than quarterly too. Sign up for EFTPS. When estimating, make sure you account for self employment taxes and income taxes. If you have a W-2 job in addition to this gig, you can just increase your withholding at that job to account for the additional liability. You may need to pay quarterly NYS/NYC taxes as well, depending on your income level. Sign up for an NYS online services account. NYC has an unincorporated business tax - you may need to file (if you make over $95K), but shouldn't owe anything unless you're making a ton of money, in which case, you should already have an accountant. A good estimate for federal income, federal self employment, nys, and nyc taxes is to set aside 40% of your income.
You are probably not required to collect and remit sales tax, but if you ever deliver a tangible product or a digital product in addition to copywriting services, this may become an issue. Consult a tax attorney if this concern arises - it is a new/evolving area of tax law.
Other related issues:
-I hope you have health insurance
-Self-employed individuals are not generally entitled to unemployment compensation, workers compensation, and disability (unless they self-fund these plans, where available). Adjust your savings accordingly.
posted by melissasaurus at 3:45 PM on July 13, 2014
In order to deduct your Metrocard expense, you'll need to set up a home office. In NYC, this is difficult because you likely don't have an extra room to designate as your "office." I have set up a desk in the corner of my living room; I use that corner for work exclusively (i.e. I only do work at that desk, no other activities, though I work elsewhere in addition); my "office" is 5 sq ft. Doing administrative tasks from that area would be work. The IRS has a new safe harbor home office deduction that is really simple to use and is based on square footage. The reason you need a home office to deduct the Metrocard is that commuting is not deductible, regardless of whether you are self employed or non-self employed. However, travel between two "business locations" is (generally) deductible.
Any items you use exclusively for your business will generally be deductible. Things used for business and personal use may be deductible to the extent of the business use. Save receipts for everything you use related to your business - credit card statements are not sufficient.
You can pay quarterly (you will likely not be required to do so until tax year 2015, but it's a good thing to start doing); you can actually pay more often than quarterly too. Sign up for EFTPS. When estimating, make sure you account for self employment taxes and income taxes. If you have a W-2 job in addition to this gig, you can just increase your withholding at that job to account for the additional liability. You may need to pay quarterly NYS/NYC taxes as well, depending on your income level. Sign up for an NYS online services account. NYC has an unincorporated business tax - you may need to file (if you make over $95K), but shouldn't owe anything unless you're making a ton of money, in which case, you should already have an accountant. A good estimate for federal income, federal self employment, nys, and nyc taxes is to set aside 40% of your income.
You are probably not required to collect and remit sales tax, but if you ever deliver a tangible product or a digital product in addition to copywriting services, this may become an issue. Consult a tax attorney if this concern arises - it is a new/evolving area of tax law.
Other related issues:
-I hope you have health insurance
-Self-employed individuals are not generally entitled to unemployment compensation, workers compensation, and disability (unless they self-fund these plans, where available). Adjust your savings accordingly.
posted by melissasaurus at 3:45 PM on July 13, 2014
The word 'freelancer' can get in the way here.
If you're an independent contractor, i.e. paid directly, without any deductions, and your pay is shown yearly on a 1099 IRS form, then it doesn't matter where you work.
There's been a lot of confusion about this over the last 25 years, stemming from the Microsoft situation. Time, manner, place, etc. -- but the problem is your client's, not yours.
As to your specific questions:
1. Metrocard. You can deduct biz travel. So if you used it only for travel from your office, i.e. your home, to your client's office, you could deduct it entirely. If you use it for other things, figure out the percentage of it that covers biz travel and deduct that.
2. Website hosting for my portfolio site. Deduct all of it.
3. Business cards. Deduct all of it.
posted by LonnieK at 6:12 PM on July 13, 2014 [1 favorite]
If you're an independent contractor, i.e. paid directly, without any deductions, and your pay is shown yearly on a 1099 IRS form, then it doesn't matter where you work.
There's been a lot of confusion about this over the last 25 years, stemming from the Microsoft situation. Time, manner, place, etc. -- but the problem is your client's, not yours.
As to your specific questions:
1. Metrocard. You can deduct biz travel. So if you used it only for travel from your office, i.e. your home, to your client's office, you could deduct it entirely. If you use it for other things, figure out the percentage of it that covers biz travel and deduct that.
2. Website hosting for my portfolio site. Deduct all of it.
3. Business cards. Deduct all of it.
posted by LonnieK at 6:12 PM on July 13, 2014 [1 favorite]
Assuming you are in fact independent, I recommend an accountant. Huge hassle and stress reduction, and likely you'll come out ahead financially too.
posted by mattu at 7:21 PM on July 13, 2014
posted by mattu at 7:21 PM on July 13, 2014
You might also think about buying one of the do it yourself tax programs like TurboTax for a small business. It guides you through a great deal of these things, has a spot for chatting about tax issues, and best of all will help you pay your taxes on time.
I agree that you might also want to consult with an accountant about some of this planning.
Lots of good information from above and remember you are responsible for being your own boss so you provide (or not) your own employee benefits as well as the employer portion of your social security benefits.
posted by OhSusannah at 10:33 PM on July 13, 2014 [1 favorite]
I agree that you might also want to consult with an accountant about some of this planning.
Lots of good information from above and remember you are responsible for being your own boss so you provide (or not) your own employee benefits as well as the employer portion of your social security benefits.
posted by OhSusannah at 10:33 PM on July 13, 2014 [1 favorite]
My contract is pretty explicit about being an independent contractor. I meant "full-time" as in I work in their office the entire time I am working for them.
Yes, for later, this is literally a contradiction in terms. But that doesn't help you with your taxes now, and it's a hard situation to deal with. Most people don't.
Anyway, since you are being treated (incorrectly) by your employer as an independent contractor, so that that person can avoid giving you health insurance and paying your workman's comp and disability, you actually are running your own business, which means, among other things, that you may also have a home office deduction. That is the place where you administer your business, one function of which is providing contracting services for this non-employer employer.
Since you're just starting out, you don't have a basic grasp on how to file taxes in this situation, so I know that the first thing you are thinking about these answer is "I can't afford to pay an accountant!" But in fact an accountant will likely save you money in dealing with your taxes. Some cost about the same amount as Turbotax anyway. They will surely recommend that you begin making quarterly payments this year, even though it's not necessarily required.
One other thing to remember is that 100 accountants doing the same person's taxes will get 100 different results. So a good referral is important. And don't be too intimidated. I'm math-illiterate, but I get through this every year. Somehow. :)
posted by RJ Reynolds at 7:01 AM on July 14, 2014
Yes, for later, this is literally a contradiction in terms. But that doesn't help you with your taxes now, and it's a hard situation to deal with. Most people don't.
Anyway, since you are being treated (incorrectly) by your employer as an independent contractor, so that that person can avoid giving you health insurance and paying your workman's comp and disability, you actually are running your own business, which means, among other things, that you may also have a home office deduction. That is the place where you administer your business, one function of which is providing contracting services for this non-employer employer.
Since you're just starting out, you don't have a basic grasp on how to file taxes in this situation, so I know that the first thing you are thinking about these answer is "I can't afford to pay an accountant!" But in fact an accountant will likely save you money in dealing with your taxes. Some cost about the same amount as Turbotax anyway. They will surely recommend that you begin making quarterly payments this year, even though it's not necessarily required.
One other thing to remember is that 100 accountants doing the same person's taxes will get 100 different results. So a good referral is important. And don't be too intimidated. I'm math-illiterate, but I get through this every year. Somehow. :)
posted by RJ Reynolds at 7:01 AM on July 14, 2014
This thread is closed to new comments.
Can you explain? My contract is pretty explicit about being an independent contractor. I meant "full-time" as in I work in their office the entire time I am working for them (i.e., I never work from home so can't claim any home office expenses), not that I am a full-time employee.
posted by cosmic osmo at 11:50 AM on July 13, 2014