Freelance tax FAQ #117

February 27th, 2008

I subscribe to a lot of self-employment and freelance writing discussion lists. Not surprisingly, this month everyone’s been buzzing about how to file their freelance taxes. Here are a few recurring questions I’ve seen.

(Note: These answers are geared toward sole proprietors like me, not LLCs or corporations, which are subject to different tax laws, about which I know diddly. Double note: I’m a freelance writer, not a financial professional. If you want solid tax advice you can bank on, you’d best check with your friendly neighborhood accountant. Okay, now that we’ve got the requisite ass-covering out of the way, let’s talk taxes…)

Q. Help! I earned more than $600 in 2007 from a client, but they didn’t send me a 1099 form. Do I still have to pay taxes on that money? Do I need that form?

A. You do still have to pay taxes on that money. But no, you don’t need the form to do so. Also, in case you were wondering, if your client tries to claim the money they paid you as a business expense, they could get into trouble with the IRS for not sending you a 1099 form. But that’s their problem, not yours.

Q. Help! I billed Client XYZ for $3,000 in December of 2007 but wasn’t paid for it until January of 2008. Do I have to pay taxes on this money with my 2007 fed tax return or should I pay those taxes with my 2008 estimated tax payments?

A. Since the client paid you this amount in 2008, you will owe taxes on it for 2008, not 2007. You go by the year paid, not invoiced. If the client tries to put this amount on your 2007 1099 form, you need to talk to their accounting department about correcting this mistake. Otherwise, you’ll be paying taxes on money you technically didn’t earn in 2007.

Q. Help! I just measured my home office and it’s 20 percent bigger than I’ve been reporting to the IRS for the past three years. Can I tell them my office is actually bigger? Will this trigger an audit?

A. Congrats! You get a bigger write-off. It’s perfectly reasonable that your home office size would increase as your freelance business blossoms, so just tell the IRS that your office space has grown. (Actually tell your accountant, and s/he will know how to indicate this on your fed tax return.)

This minor change in office size alone should not trigger an audit, unless of course you’re unfortunate enough to be randomly selected for an audit (like jury duty, only more painful). As I understand it, if the IRS intentionally audits you, it’s because you have some serious red flags on your tax return — for example, an inordinate amount of expenses claimed. Your accountant is there to ensure this doesn’t happen. Yet another reason you should not solely rely on random internet advice when doing your taxes.

Final notes: There is a limit to what percent of your home you can write off as office space. Because I’m too lazy to Google it, you’ll have to ask your accountant about this. Also, the IRS wants your home office space to be solely dedicated to your business, so be careful that you don’t blur lines here.

You can find more of my freelance tax FAQs here and here. And you can find an accountant by asking your freelance friends who they use.

Entry Filed under: Ask the Cubicle Expat,Money honey,Toolbox

4 Comments Add your own

  • 1. Diane  |  February 29th, 2008 at 4:28 pm

    You offer the best freelance advice (not to mention the funniest ass-covering caveats) in town, Michelle. Couldn’t have made it through tax season without you (and um, my accountant, of course).

  • 2. Michelle Goodman  |  February 29th, 2008 at 4:29 pm

    Ha, Di. Nice save. ;)

  • 3. her every cent counts  |  March 3rd, 2008 at 3:28 pm

    I love, love, LOVE your blog. Thank you so much for all these helpful tips. The orange background and great head graphic also make me smile. :)

  • 4. Michelle Goodman  |  March 3rd, 2008 at 3:42 pm

    aw, shucks. thanks, HECC!

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Hi, my name's Michelle Goodman and I've been freelancing since 1992. I'm author of My So-Called Freelance Life and The Anti 9-to-5 Guide. Read my full bio here.

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