Help! I'm a newbie freelancer who needs guidance on taxes
July 20, 2013 9:10 AM   Subscribe

I'm new to the world of freelance writing but not making enough to hire a tax advisor. Should I start paying taxes in September? And how can I write off the depreciation of my laptop?

So I have multiple streams of income. I just started freelancing earlier this month.

1. $1500/month from an internship, runs from July to October, four months total = $6,000

2. $100 - $200/month from a freelance writing position

3. $400 - $700/month from a second freelance writing position

Since I'm making over $400, I know I'll definitely need to report the income. I do have some things I know I'll write off, like train tickets and home office (I read about that new $5 x square footage rule).

I guess my question is...since I just started this month, should I be reporting my taxes starting in September for that quarterly taxes thing? And can I (and how should I) write off depreciation of my laptop? Or use of my camera? Or should I just buy a separate laptop now so I don't have to mix the two? I know taxes cut into freelancing income a lot...

Thanks so much!
posted by bluelight to Work & Money (13 answers total) 2 users marked this as a favorite
Where is home? Different regions, nations have different tax rules.
posted by philip-random at 9:14 AM on July 20, 2013

I'm in the state of Maryland.
posted by bluelight at 9:19 AM on July 20, 2013

I'm a freelancer and I'm not going to touch most of those questions, but this book (other Nolo books were also helpful) helped explain the concepts to me in layperson's terminology.I also have hired a CPA most years to do my business taxes.

One concept both the book and the CPA explained to me was that if you plan to deduct the use of an item, you need to keep a notebook for the item.So let's say that I want to write off part of my phone line.I would need to have a log book showing hours on the phone and hours on the phone for the freelance business. Then I can deduct that proportion of the bill. So deducting for use of the laptop or camera would be painful (well, it would be for me) as you can see(i.e. as can you track amnt of hours for personal and freelance use?)

So what I have done is to buy things specifically for the business.I will buy a laptop later this year and have no problems claiming that because I have another laptop for personal use.But that's me when I saw the rules.

I work exclusively from home and my CPA recommended not to deduct a home office, although the NOLO book gave contradictory advice. If I were to walk that route, then I would hire a contractor to officially measure the space in my apartment and deduct that amt;I would also use money from business account specifically to pay for that. However, I've been audited once (it was fine) and know of other freelancers who have had that deduction later evaluated and sometimes denied, so YMMV.
posted by Wolfster at 9:30 AM on July 20, 2013 [1 favorite]

When I was doing contract work, I used a Nolo Press book for guidance. They're excellent. I also visited an Enrolled Agent to make sure that I had my ducks in a row. She charged around $100 (I don't remember) for a thorough personal consultation and follow-up questions by email. I think it was worth it!
posted by wintersweet at 9:31 AM on July 20, 2013 [1 favorite]

I've been a freelance writer/editor for several years and the one piece of advice I'd give you is: hire a tax person. I know you say you're not making enough to hire a tax adviser, but honestly, you're not making enough NOT to hire a tax adviser.

In California, I pay my tax person $300 and she is worth every penny - and more. He/she will be familiar with all the rules and regs specific to self employment, as well as set you up for quarterly tax payments, etc. The only thing you'll have to do is save/organize your paperwork (invoices, pay stubs and receipts). I tried to go it alone for a couple of years and I sincerely regret it.
posted by hapax_legomenon at 9:43 AM on July 20, 2013 [3 favorites]

Overview of making calculating and making estimated tax payments.

Additional details from the IRS about who must and how to make estimated tax payments.

You'll go through a similar process with your state taxes for Maryland. Sign up for an i-file account if you haven't already and it is very easy to make your estimated payments (and your whole return next year) online.
posted by drlith at 9:55 AM on July 20, 2013 [1 favorite]

Also, re: laptop depreciation and home office deductions: my tax person has all of those calculations set up in her tax prep software so you really don't even have to think about it. You'd just tell him/her how much you use the laptop for work vs. personal, and how big your home office is vs. the rest of your home, and they figure out all of that for you. Since I go the route of having one laptop, one mobile phone, etc. that I use for both work and personal stuff, I just estimate usage to the best of my ability and she tells me what she thinks the IRS will think is fair. Buying duplicates is obviously an option if you think that will be too much hassle, you have the funds to do so, etc. For me having dups would be a hassle for my process and I don't stress about whether or not my estimates are exact down to the decimal point - but everyone's different.

One last thing you absolutely should do: take a percentage of each check you get and put it into a separate "tax savings" bank account. Do not touch that money for any reason whatsoever until it's tax time.
posted by hapax_legomenon at 9:57 AM on July 20, 2013

Hire a CPA. Just do it. You're looking at up to almost ten grand in receivables. That's potentially a maximal tax liability of something in the neighborhood of $4,000, but your actual liability will probably be something closer to $2,000-3,000. Only if you do it wrong, you could wind up paying more than $4,000 after interest and penalties.

A CPA will cost you a few hundred bucks. So not only will the CPA help you figure out your actual liability, avoiding interest/penalties/overpayment, it'll also save you at least a few hours of time spent futzing with the issue. Figure out what you make per hour and do the math. Oh, and you can definitely claim the accountant as a deduction, so there's that too.

But for what it's worth, I'd avoid the home office deduction, actually. The rules are very narrow, i.e., if you use the space for anything else, it doesn't count. The IRS actually treats it as something of a red flag for audits (discussion) because it's so easy to use incorrectly. Which is just one more reason to view the NOLO products askance. They really don't give great advice a lot of the time.
posted by valkyryn at 10:01 AM on July 20, 2013

There's no need to be scared away from the home office deduction if you use it the way it is intended. That is, the room has to be your office, not a combination office and guest room, or combination office and hobby room, or mixed with any other non-office use. Notice that in the Kiplinger article linked above, it is only one of a dozen "red flags." By itself it shouldn't make you worry if you aren't bending the rules.
posted by Longtime Listener at 10:27 AM on July 20, 2013

I have used TurboTax and had no issues. You do need to pay quarterly likely federal and state, potentially city.
posted by manicure12 at 11:14 AM on July 20, 2013

since I just started this month, should I be reporting my taxes starting in September for that quarterly taxes thing?

Probably. I didn't pay quarterly during my first year of self-employment and I wasn't fined because there was some sort of forgiveness for newbies. However, that was some time ago and the rules may have changed, so if you've got the money, pay.

The quarterly calculation will be a bit of a pain this year, but if you file your 2013 taxes using TurboTax, the program will helpfully spit out four payment vouchers with amounts on them for next year. As the SBA link said, you have to pay at a minimum what you paid last year, and that's what TurboTax's vouchers show -- the legal minimum.

If you make a lot more money the next year, happily you still pay the minimum required each quarter, and then you pay the extra tax owed on April 15. Of course, your quarterly payments then go up. If you make less money the next year, figure your quarterly payments manually and pay that.

To be able to make the quarterly payments, set aside a chunk of your earnings each month. I use a separate online account that pays a bit of interest.

I don't take the home office deduction or try to write off my laptop because everything is mixed use and just keeping track of my mileage was annoying enough.
posted by ceiba at 11:44 AM on July 20, 2013

When I read "not making enough to hire a tax advisor" above the fold I thought "Oh, only a couple hundred dollars. But below the fold I see you're making $10K+. That's where you really should hire a professional. They will completely pay for themselves. Shouldn't charge more than $300 and will save you more than that, probably many times more than that since this is your first freelance tax rodeo.

But on top of the fact that paying a professional will actually save you money* they'll give you a huge peace of mind. No more fretting about if you depreciated that laptop correctly or if you claimed (or didn't claim) a business expense properly. Every tax professional i've worked with is happy to take calls throughout the year as questions come up, no charge.

*"Paying someone to save you money" seems like an oxymoron to most people, but it's a survival skill for freelancers. I frees you up from the little things to focus on the things you do to make money.
posted by Ookseer at 12:09 PM on July 20, 2013

I did freelance for several years. I second/third the idea of hiring a tax adviser / cpa this first year at least. Once you start getting a sense of the sorts of things you can deduct for and how to do quarterly tax payments and what sorts of things have a higher chance of auditing, etc, you can likely start doing your own taxes again...but the first couple of years it is invaluable to get someone to help you navigate the total morass that is the US tax code.

As a general rule of thumb, I set aside 40% for Income and self-employment taxes (which assured that I had more on hand than I owed).
posted by Wink Ricketts at 2:57 PM on July 20, 2013

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