You won’t be surprised to learn I’ve been thinking about money a lot lately — what with that whole freelance taxes thing looming next month. If you’re just sorting through your first batch of 1099s, this can be a nerve-racking time.
It’s cool. Take a deep breath. I’m here to help.
First up, my lawyers recommend that I tell you I’m a sci-fi writer/content marketer and not a tax professional. (You probably won’t be surprised by this.) The upside is that I’ve come up with a system that works well for my creative-business brain, and isn’t mired in tax-professionalese.
Here’s how I manage my freelance taxes.
1. Plan for freelance taxes
This may seem self-explanatory — after all, everyone knows they have to pay taxes, right? But if you’re just getting into freelancing, it’s actually a pretty different concept.
When you get a W-2 paycheck, your employer pays taxes on your behalf. When you’re a 1099 contractor, the responsibility for prepaying taxes falls on you. If you don’t make estimated quarterly payments — or don’t make large enough estimated payments — you’ll be charged a penalty at the end of the year. Oops.
(If you live in a state that charges taxes, be sure to make quarterly payments to them, too.)
The other thing is that when you’re self-employed, you get to pay self-employment tax on your income.
What’s self-employment tax? Basically, every worker pays taxes for Social Security and Medicare. But when you get a W-2 paycheck, your employer picks up half the bill. As a self-employed person, you get to pick up the whole 15.3% tax.
Along with making quarterly payments, set aside a portion of every payment you get into a special tax savings account so you don’t get caught empty-handed on April 15.
I put 1/3 of every check into a separate savings account, out of which I pay my final taxes. Anything left is a buffer that helps me not get so stressed out during lean times.
(Want to learn how to manage your freelance income ebb-and-flow? I wrote about my freelance finances on The Write Life.)
2. Keep good records
The great thing about running your own freelance business is that you can write off all sorts of things related to your business. Things like conferences and courses, for sure, but also things like home office, internet, and a new laptop.
Oh, and books and going to the movies if they are relevant to your work. Renting The Untouchables and Goodfellas on Amazon Prime is totally research for my gangsters-in-space Durga System series.
For a good primer on what you can and can’t deduct, check out this post from Nation1099.
The ability to write things off is fun. What’s not so much fun it’s pouring through a shoebox full of receipts trying to figure out how much you spent on what.
Please. Don’t do that yourself.
The smarter way to organize your expenses is with an accounting program. For several years, I used FreshBooks to send out invoices and organizing. For 2017, I switched over to QuickBooks because I restructured my business to be an S-Corp (more later) and my awesome tax lady told me to. Check out their business expense page which helps you easily track your expenses throughout the year in order to get every deduction at tax time.
FreshBooks is a lot more intuitive for the newbie, but QuickBooks seems like it will be much more powerful. If you’re working with an accountant, ask what they prefer to work with. If not, play around and see what you like.
Both programs automatically import your expenses from your bank accounts and PayPal, so all you have to do his check them on occasion and make sure are categorized correctly. I do this a couple times a month.
Because these programs made it so easy (and because I perversely like doing my taxes), I actually turned in all my paperwork to my accountant in February, and signed off on the final tax forms in early March. (Don’t hate me.)
3. Rethink your freelance business structure
This year I ended up making a lot more than I did the year before. (Yay!) Which meant that I got to pay way more taxes than I was expecting to. (…yay?)
One thing that should help avoid that in the future is changing my business structure from a sole proprietor to an S-Corp.
According to my awesome tax lady, there’s a sweet spot where registering as an S-Corp saves you money. How it works is this: Basically, instead of treating all of your 1099 income as personal income, this classification lets you treat all that income as business profit, out of which you pay yourself a salary. Therefore you only have to pay self-employment tax on what you actually pay yourself.
This tip won’t help you for 2016 taxes, but if you think you’re going to make more than part-time wages as a freelancer in 2017, talk to a tax pro about reclassifying.
4. Work with a pro
I used the pride myself on being able to do my own taxes — it’s really not that hard, and I do actually like numbers and spreadsheets. (In small doses.)
But for the last couple years, between my husband’s sales jobs, home ownership, and my freelance taxes, we finally decided to hire a professional.
I give her raw papers and she spins them into tax returns, complete with finicky deductions I never would have known to take.
It’s such a relief to have someone who is able to advise you about what kind of deductions you can take, how to structure your finances, when you should change your business structure, and all those other confusing money questions.
Again, if you want to make your writing business work for real, invest in your business by hiring a pro to do your taxes. You’ll get back at least that much in tax savings!
Try to find somebody who specializes in working with freelancers, if you can, and don’t be afraid to ask them all the questions. They’re there for you.
I hope that helps! And happy accounting, everyone. May your tax days be filled with chocolates and rainbows.