freelancing and money matters

Looking for some advice from anyone who's done a good amount of freelancing ...

I did a little last year, but not enough for it to make too much difference on my 2005 taxes. I'm doing more of it this year. If the second half of the year unfolds like the first six months, I'm looking at about 10 K worth of freelancing for the year. I know I'm going to get destroyed at tax time and I'm wonding how much I should be setting aside now.

I know I can minimize the damage with writeoffs. Aside from the obvious things (internet, phone, magazine subscriptions) and bearing in mind that I don't have any travel involved, what else can I write off? And what's a good rule of thumb in terms of what percentage of each freelance check I should earmark for paying taxes? Any insights are very much appreciated.

 

Write-offs make all the difference. Made 10k two years ago, but had write-offs galore -- gas, two computers, etc. Ended up getting money back. This year, made 2k less and owed 1k because my write-offs just weren't there.

 

if you have a home office, make sure your accountant knows about it. you can take off part of your mortgage as long as you can prove it's an office.
all supplies, etc.

 

I put aside 25 percent of each freelance check to avoid any end-of-year disasters.

 

My wife freelanced for about a year. Schedule C is the key. Put everything you can on there as a business expense. Keep scrupulous mileage records (keep a notebook in your car, note the mileage everytime you start for an assignment, and when it's done.) If you keep good records, and sock back 25 or 30 percent of your pay, you should be fine.

 

Set aside 25 percent for taxes.
Pay quarterly taxes (next is Sept. 15, I think) on the gross, then take your expenses on your 1040 and you'll likely have a nice refund coming.
In theory, quarterly tax payments are supposed to be equal through the year, but when your freelance income doesn't come in equally, that's impossible to estimate. Just pay in a quarter of what comes in and the IRS will be happy to cash the checks.
Your state may also expect something; they'll be on the same schedule.

 

Don't forget books and cable television, meals and lodging while on the road, postage, association fees and union dues, commissions, movies you've seen (if you were to compare a game to Adam Sandler's latest film you'd be triangulating several points of popular culture, blahblahblah), and on and on and on. There is a huge range of legitimate deductions available to a freelancer (what does it cost to heat your office?), so treat yourself like a small business. Get a tax consultant, if not a full-time accountant, because there's almost no way to keep track of changing tax laws on your own.

What you set aside depends on your tax bracket. Since all my earnings come from freelancing, I reserve a third of everything I earn in anticipation of taxes. As was said before, you can pay quarterly if that better suits your needs. What I like to do is set aside that third of my income as it comes in. I put it in some sort of interest-bearing account; or into a short-term CD. Anything that generates a couple of percentage points of growth between the time it arrives and the time I have to pay it back out. Why let the government have the money before you've had the chance to maximize its utility?

And don't forget that as a small business, you're largely responsible for crafting your own retirement plan. Earning a couple of dollars interest on your income before the tax bite is a good strategy for setting aside some more money for the future.

 

Paying quarterly is definitely the way to go if you want to avoid an unexpected fleecing come April. I had to pay a buttload of money last time, and that was with a lot of deductions. The thing about deductions is, you raise a red flag if they're are a large percentage of your total freelance earnings. So if I made five grand last year and my deductions are three grand, I'm begging for an audit. At least that's what my accountant told me.

To me, the two biggest factors in making money and not making money off freelance are: kids (you can rake it in if you've got 'em) and freelance that pays under the table. I've come to learn that the $250 check under the table is more worth my time than the $800 check that gets taxed. It almost becomes not worth it to spend all that time working on preseason mag previews.

 

I see a lot of great tips here. I just started in February, and I visited with a tax accountant for a few minutes earlier this month. She mentioned the possibility of incorporating if the income hits a certain point. I'm not sure what that point is. But, essentially, you can get out of paying so much employee tax by incorporating. Then you pay yourself as a shareholder rather than as an employee. I believe that's the short version of it, but I'd check with someone before proceeding with incorporation.

I'm about to finish my first book. I haven't pitched to anyone yet, but I hope to have it sold by the end of the year. If anyone has tips on this figures into things, I'd love some advice. I'm assuming that a book advance is simply tacked onto your freelance income and taxed. But are there any tricks that can keep this money free of tax? And are there any special deductions for authoring a book?

 

I don't want to grow up...

 

Years ago when I was freelancing quite a bit, I calculated that after taxes and insurance, I couldn't possibly do enough at the less-than-dollar-per-word rate I was getting to make it worth my time.