October 27th, 2006
A lot of people ask how we self-employed types pay our taxes. Just last week a coworker of my sister — at the Teamsters! — asked me a slew of IRS-related questions. For your viewing pleasure, I’m posting our little Q&A here.
Know that I’m not an accountant (nor do I play one on TV), so I strongly encourage you to talk to an accredited tax preparer about any self-employment tax questions, preferably someone who knows the tax laws in your city and state inside and out. Even H&R Block will do the trick. Additional resources: the IRS website, Nolo, FreelancersUnion, and SCORE.
Q. I work from home as a freelancer. Can I deduct a portion of my rent?
A. Yes. There’s a cap on what percentage you can deduct, which you should look up (or ask your tax pro about). There are also IRS rules about having an office with a door that shuts or some such (see why you need the tax pro?). I’ve deducted anywhere from 25 to 30 percent of my home and utilities for the past decade or so. Oh, and in case you’re wondering, I work in a spare bedroom, with shuttable door. And my accountant keeps me in line with the fed tax laws, some of which change every couple of years.
Q. Can I deduct my computer and printer?
A. Yes, but there’s again some wiggy law I’m not entirely versed in without further research that says you should (or perhaps it’s “can”) deduct your office machines as a depreciating expense for several years in a row. If you bought the computer/printer ensemble before going freelance, I suspect you can’t deduct the purchase price, but again, the IRS website, which is suprisingly easy to navigate, or an accountant can tell you more. You can deduct printer paper, cartridges, new computer peripherals, and repairs though if you’re using your computer for your freelance work.
Q. Can I deduct my Internet service if I use it for work?
A. Hell yeah.
Q. Do reimbursements for expenses incurred on my client projects count as taxable income?
A. No, you won’t be taxed on payments your clients make to refund you for project expenses (long-distance phone calls, FedEx shipments, and the like). This is probably obvious, but you also can’t “write off” the expenses you’re reimbursed for. That’s what’s known as cheating.
Q. Is 30 percent of my income a fair estimate of what I can expect to pay in taxes?
A. That totally depends on how much money you make. If you’re raking in six figures, you may be more along the lines of 40 percent (though I’m guessing without a calculator here — not that I’d know what to do if I had one in hand). But if you’re a middle class drone like me, 30 percent sounds about right, possibly a little more or less. Also, your expenses (tax write-offs) drive this percentage up and down each year, as does any other non-freelance income you make. If I were you, I would want to show all my records to an accountant or tax preparer to make sure I’m barking up the right tree. Without having any idea what your income or work situation is, and without being fabulous with numbers myself, I can’t give you a hard-and-fast percentage to ship off to Uncle Sam each year.
Q. Do you think there is anything else I should know about paying taxes as a freelancer?
A. There is a lot more to know. For starters, if your freelance clients aren’t taking taxes out of your checks, you need to pay quarterly taxes to the IRS. You can find the appropriate forms on the IRS website, or any tax preparer can give you them. In January, these clients will send you a 1099 form (that is, if they’ve paid you more than $600 in freelance income during the previous calendar year). You use the dollar amounts from these magic forms when assembling your annual tax return; your accountant should ask to see these forms.
You may also need a business license depending on your city and state requirements. In Seattle, where I live, a city business license costs $90 annually for a freelance writer and requires me to file a city income tax return (though at my income level, what I owe each year is nominal); in my state, a one-time business license for a freelance writer is $15. My state business taxes are also pretty nominal. They really just want the form to see what you’re up to. Know that business license fees will vary from profession to profession; the minute you start bulldozing property (as a building contractor) or collecting sales tax (as a product manufacturer), everything changes.
That’s all for today, class. Later this week (or season) we’ll talk more about business licenses and retirement funds for freelancers. Fun, fun!