- 04.07.14
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[Photo: Reinhard Hunger for Fast Company]
Taxes For Freelancers: Live Chat With Tax Expert Jonathan Medows
Join us on Friday February 20th at 11:30 a.m. EST as we chat live with tax expert Jonathan Medows about how to tackle filing your taxes when you're self-employed.
Like filing the right health insurance, filing taxes gets a little more complicated when you don’t have an HR department to guide you.
We asked tax experts how to tackle tax deductions from a freelancer’s perspective, to get the most out of your deductions. And we will be hosting a live Q&A to answer more general freelance tax questions.
Join us here on Friday February 20th at 11:30 a.m. EST as we chat with a tax expert Jonathan Medows. He'll be answering your general freelancer and independent worker tax questions.
Get your questions in now using the "make a comment" box below.
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We're gearing up to get started in less than an hour! Start getting in your questions now, freelancers!
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Rachel Gillett, Leadership editorial assistant for Fast Company here! We’ll be getting started in about 10 minutes, so stay tuned for the answers to all your freelancer tax questions. And don’t forget to send in your questions now.
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If you’ve got 1099 problem and no refund, you’ve come to the right place. Welcome to our Taxes For Freelancers live chat!
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We have the wonderful tax expert and CPA Jonathan Medows joining us today to guide us through some of the most common tax afflictions freelancers suffer from.
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Since Jonathan doesn’t know your full, specific work history, he can offer general guidance for the self-employed professional, freelancer, and entrepreneur. If you have questions, let’s hear them!
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Hi everyone. I hope you are in a warm place as it was 1 degree Fahrenheit in Manhattan this morning.
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Let’s start by discussing what it means to be a freelancer, contractor, consultant, etc. Can you walk us through those different distinctions?
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I'm answering from a tax perspective. If taxes are not withheld you are considered self-employed and need to report your freelance income on your taxes and may claim ordinary and necessary expenses against this self-employed income.
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Basically these are all synonyms if taxes are not withheld.
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Can you explain to us how much more a self-employed person pays in taxes than a salaried employee, and why this is the case?
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typically 7.65% as the self-employed person has to pay both the employer and employee portion of social security and medicare taxes. In addition, in jurisdictions like New York City there may be additional taxes such as the unincorporated business tax and MTA tax.
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Hello everyone. Last year, I had to sign a few 1099's for a few companies for the first time and am filing my taxes soon. Should I be filing separate from my w2 that came in?
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Yes, those are reported on Schedule C of your tax return. You are also allowed to claim business expenses which will help to reduce your tax liability.
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Schedule C is profit or loss from business activities. This is typically where self-employed people report their income.
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I've heard that as a freelancer you are required to file taxes quarterly, is that true? Is there a penalty if you only file once a year or is this requirement just a suggestion?
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If you are making a profit from being a freelancer you are required to pay estimated taxes. Government wants you pay ahead of time in quarterly increments. If you do not do this there may be a penalty, in addition to the actual income tax owed, when you file your annual tax return.
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Just started freelancing last tax year and discovered that from this year on forward (after the one year "grace period" of last year), I have to start filing taxes ahead of time every quarter that I do freelance work. What are the details behind this and how can one get this process started and finished?
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In regards to estimated taxes, you are required to pay the lessor of 90% of your current year tax liability or 100% of your last year tax liability (110% if your income is more than $150,000) or you run the risk of owing underpayment penalties.
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Hello! My very simple question is: Without factoring in deductions, what percentage of gross income do you recommend setting aside each month for taxes to play on the conservative side of things?
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I'm a bit conservative as well so I recommend 30%-33%.
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What if you estimate that you will make a lot more or a lot less any given year. Are you still required to pay the estimated tax based on the previous year?
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No, you can pay based on your current year projections but make sure, at a minimum you pay the lessor of 90% of your current year tax liability or 100% of your last year tax liability (110% if your income is more than $150,000) or you run the risk of owing underpayment penalties.
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If I have clients that have paid for a service that I provided, but they have not provided a form 1099 to me... then do I report that income? I have heard 2 separate approaches to reporting income. The first method says that you report that income from your clients that provide you with a 1099 at the end of the year. The second method says that anything that is a Deposit Transaction into your business checking account should be reported. The problem with the second method is that not all deposits are income from business services.
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Your are absolutely required to report this income. Not reporting this is tax evasion.
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I owe about $400 this year and I'm not sure why. I was told by H&R block to pay 15% of my income each quarter and I would be fine. My taxes say my effective tax rate was 27%. What gives?
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Estimated tax calculations are typically based on prior year income and assume the same pattern of withholding and non-withholding. Sounds like your mix was different or you made more money. Hence, the owing of money.
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I paid a printer (vendor) around 25k for their services over the course of the year. I paid online through their website with a debit card. Do I issue them a 1099-k or does my bank issue the 1099-k?
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Your bank should. We had this come up with another client and we were advised when someone pays via credit card not to issue 1099-Misc as the 1099k is reporting this income.
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In 2014, I spent most of the year as an independent contractor. In my spare time, I also started working on my own idea and incurred a couple thousand dollars of costs associated with that (supplies for prototyping the product, basically). I have not yet incorporated nor has the business actually launched yet. Am I able to deduct those expenses as business expenses, and if so, do I need to deduct them under a separate "business", or can I combine them with my consulting "business" (again, not an actual business, just 1099 earnings)
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yes, it's a start up activity but you are allowed to take off the lesser of $5,000 in costs for start up activities or what you actually spent.
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Is there any way (other than an IRA) that I can put money away for retirement?
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It depends on whether you are self-employed or working for someone. For the self-employed there is the IRA, Roth IRA, SEP IRA, Self-employed 401k plan, SIMPLE IRA, etc. I can think of 10 off of the top of my head. I would consult with a financial advisor regarding this and figure out which is best for you as they all have pros and cons.
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Can you talk about what to watch out for when reporting health insurance taxes for freelancers? As the first full tax season following the Affordable Care Act, it's the first time some of us are dealing with this section in our filing.
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Sure, make sure you report your coverage for the whole year especially if you got a subsidy from the exchange. Also, as a freelancer, if you have a profit you can also claim your health insurance as an adjustment against your gross income. This will help to lower your income tax burden.
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One thing people might overlook when it comes to the sharing economy is the tax bill.
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Here's Another Thing About The Sharing Economy You Might Not Have Thought Of: The Tax Bill
Fast CompanyAirbnb your room? Drive for Lyft? Unfortunately, that extra income isn't free money. -
Do you have any advice for people who are letting out their apartments so they’re not shocked and appalled come tax season?
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Yes, this is potentially taxable. You should keep track of your expenses as it can help you to offset your income. For example, if you rent your apartment you can pro-rate your rent for the days you rented out and claim as an expense. Same for utilities. You can also take off cleaning fees and other costs. Further good news, per the IRS if you rent your home for less than 15 days the rental income is not taxable.
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I designed some posters and paid to have them printed. I then gave these posters to a charity for them to sell at an event. What can I deduct as a charitable contribution? The cost of my time? The cost of printing? The total revenue generated from the sale of the prints? If anything, what documentation do I need of said donation?
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You can take off the costs of supplies and materials but not your professional time. You should save the receipts paid for these items.
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If a client issues you a check and no 1099 in December 2014 but you don't deposit it until Jan 2015, do you report that as 2014 or 2015 income?
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When you receive the check is when it should be reported.
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I have a couple of clients in another state. I do all of my work from my home and connect with the clients over email. I do not work on site for them. Am I supposed to file a state return where those clients are located?
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If you do not have a connection to the state (nexus is the technical term) and all of the work was performed where you live it is not taxable in the client's state.
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Trying to find a CPA to tackle my freelance taxes--what is the best way to find a reputable one w/ expertise on freelancers? Tried asking around but most freelancers I know are out of state & don't know anyone locally.
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A good question. Ask for referrals from friends is always a good start. Use the internet as well to find people that specialize in self-employed taxes. Make sure the person is licensed and ask for references.
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Do you have any tips for people just starting out as freelancers?
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I would recommend they get in the habit of keeping track of who owes them money, revenue and expenses and making sure they pay estimated taxes. They also need to keep original receipts (or scanned copies) in case of an audit.
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What are some common mistakes you see freelancers make with their taxes?
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Not keeping original receipts. In case of an audit the IRS will not accept bank statements. If people do not have receipts they should do their best to replicate them now. Go back to vendors where they did business for large purchases.
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Another mistake is freelancers not paying estimated taxes or getting professional help to see if structuring their business will help them to save money in taxes. I get plenty of calls from people who try to do taxes themselves and then call me in a panic wanting me to fix things. Unfortunately, it's usually too late. You need to be proactive. -
What's the best way to file/store receipts & how many years are you required to keep them? I find that the ink wears off quickly on receipts but if you scan/save them, does that count as "original receipts"?
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I personally keep them in binders in date order. Scanning should be acceptable unless you have a super cranky and crazy auditor. Keep for 6 years (technically 3 but in case the IRS assets fraud they can go back 6 years).
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Are there any programs you recommend for tracking freelance income and expenses? I use Harvest right now but wondering if there's something better.
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A lot of my clients use QuickBooks. Some use Quicken and a few use Xero. Some also use Freshbooks.
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What are some common red flags that often prompt an audit?
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Excessive travel or meals. Very low profit or a loss.
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All right folks, that about wraps things up. Thanks so much for your participation, and thanks to Jonathan for joining us today!
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Thanks everyone for joining. Unfortunately, I need to get back to helping clients. Hopefully, we can do this again.
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That was super helpful, thanks so much for doing this!
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Do you have a website so people can contact you to request your CPA services?
