Introduction to Taxes for Freelancers

Guest blog, courtesy of NAFLP member attorney Vincent Kan*

Introduction

Freelancing provides many great benefits - the pride and satisfaction of owning your own business, flexibility in how you accomplish your work, improved work-life balance, amongst others. However, with all the benefits comes all of the burdens of ownership including paying income and employment taxes. Understanding these obligations is important to ensure taxes are paid on time and without stiff penalties from the Internal Revenue Service. For the purposes of this article, I will assume that you are either a sole proprietor or the only member of an LLC which has not made a Form 8832 election to be treated as a corporation (and is also treated as a sole proprietor). Freelancers operating in the corporate form (with or without an S election) face additional reporting requirements and restrictions at the entity level.

Employer Identification Number

Most businesses are required to have an Employer Identification Number (EIN) from the Internal Revenue Service in order to process their ongoing tax obligations. Sole proprietors can use their social security number(SSN) in lieu of an EIN if they do not have employees or file excise, employment, alcohol, tobacco, or firearms returns. Despite this, freelancers may still want to get an EIN for their work as many businesses who pay you are required to get your either your SSN or EIN (through Form W-9) in order to meet their own information reporting requirements to the IRS (usually Form 1099-MISC). Having an EIN both future-proofs your business in the event you do need to hire employees of your own to help manage your work and minimizes the risk of identity theft through disclosure of your SSN to your vendors.

Income Tax

Like your former employer, you as a freelancer are subject to income tax on your freelance work’s gross income minus deductions and credits. As the vast majority of freelancers will be on the calendar-year cash method, this means that . . .

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Jere R. Batten of Batten Accountancy will be featured at NAFLP’s August 12, 2008 event in San Diego

NAFLP is pleased to introduce one of its panel members for “Logistics for Freelancers,” part of NAFLP's August 12th "Finding Freedom! Working as a Freelance Legal Professional" event at the University of San Diego.

Tax planning for any self-employed professional, including legal freelancers, can seem complicated, but Jere Batten has a way of making it simple. She will be giving an overview of what freelancers need to know about taxes and tax planning.

Jere R. Batten is a certified public accountant and a certified fraud examiner who is currently the president of Batten Accountancy, Inc. in San Diego. Ms. Batten has over 16 years experience in conducting audits, preparing tax returns, and consulting for small businesses, not-for profit organizations, and individuals. She received her CFE designation in 2002 and specializes in fraud prevention with her clients. She conducts fraud investigations usually pertaining to embezzlement issues and financial statement fraud. She is a member of the Association of Certified Fraud Examiners, the American Institute of Certified Public Accountants and the California Society of Certified Public Accountants.

Batten Accountancy, Inc. is a full service accounting firm for businesses, individuals and organizations that are serious about growth. Our clients value strategic planning and rely on accounting information to make business decisions. We work with clients who have high ethical standards and expect the same from their business advisors.

Register now to attend the August 12th event!

Practice Pointers - Making Tax Time for Freelancers Less "Taxing"

Transitioning from getting a regular paycheck to getting paid as a freelancer can result in tax shock if you have failed to properly plan for your tax liability. With some simple planning, it can be much less traumatic.

CAVEAT – The following constitutes general suggestions of the author who has been self-employed for 13 years. It does not constitute legal or tax advice for any particular reader and by no means is a substitute for advice of a tax professional.

Regular paychecks have taxes withheld in an amount that at least approximates your tax liability at year’s end. This, of course, does not happen with self-employment income. Not only are there no withholdings, but you will probably be subject to self-employment tax in addition to your regular tax rate. Failure to pay estimated tax payments (as many freelancers do), you could result in a hefty tax bill on April 15th and possibly even additional penalties.

There are ways to avoid or minimize this unpleasantness.

First, and most importantly, talk to a CPA. It is impossible to overestimate the value of a competent CPA to your business. They can review your personal financial situation and make appropriate recommendations for recordkeeping and tax planning that fit your own situation.

Second, separate your business and personal finances. Whatever the structure of your business, take practical steps that will allow you to record and track income and expenses that are related to your business. It is complicated and inefficient to go through your personal checkbook to pull out business-related expenses for your tax returns, or other purposes. A simple solution can be to have a separate checking account into which you deposit all fees earned, and out of which you pay all business expenses. This will help you work with your CPA to maximize available deductions and ensure that your tax returns are correct.

Third, set aside money for taxes where you won’t be tempted to spend it. Armed with the information from your CPA, allocate a certain percentage of each paycheck to estimated taxes. It can be helpful to set this aside in a separate savings account to have handy for estimated tax payments or year end tax liability. Remember, your employer took this money out of your paycheck before, now you are your own employer.