Posts filed under 'Money honey'
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.
February 27th, 2008
Not everyone likes Suze Orman. But if she wanted to give you free financial advice, wouldn’t you take it? Considering she knows a hell of a lot more about money than I do, I would. So I downloaded her book Women & Money for free from Oprah’s website just now.
You can too. For free. Today, February 14 only. Until 5 pm PST. From this here link.
Happy VD!
February 14th, 2008
Denis writes: I’m 23 and just started doing freelance work this year. I did work for three different clients and I didn’t receive more than $600 from any of them. So I’m not going to receive a 1099 from any of them. Do I still have to report that income? If so, then can I deduct expenses such as internet and computer accessories? I just wanted to know what you think based on your past experiences.
I answer: Congrats on starting to freelance. Exciting! As for your question:
(1) From what I understand, and what an accountant once told me when I was starting out more than a decade ago, technically you have to report to the IRS (pay taxes on) any income you earn as a freelancer. Your clients might report that they paid you $200 for a job, and through its omniscient brain, the IRS could catch wind of this and come after your self-employed ass for the money it’s due. Or something like that.
That’s not to say I haven’t heard of freelancers doing the occasional one-time $100 job they knew the client wasn’t reporting and electing to keep that information to themselves, not that I’m advocating trying to screw the government out of its hard-earned war funding or anything. Mess with Uncle Sam at your own risk.
(2) Without being a financial professional, and without knowing your situation, it’s impossible (and professionally irresponsible, not to mention risky) for me to advise you what to do. But here are a few questions for you to ask yourself:
- Do the city and state in which you live require you pay business taxes? If so, you may owe them money too. Check your city and state licensing departments to find out.
- How much income are we talking about anyway? If it’s just $100, you might be able to go away quietly into the night without any political entity being the wiser (see above), not that I’m advocating you do. If it’s $1,500, I suggest you talk to a tax pro who can advise you how much to pay up. H&R Block has a free “Ask a Tax Advisor” service on their site that might be helpful. Or you could get TurboTax, which supposedly walks you through every little detail of filing your taxes.
- Do you also have a full-time staff job that’s taking taxes out of your paycheck? How much you’re already sending to the IRS through your day job might affect how much you’ll owe on your freelance earnings. Again, a tax pro who’s looking at the big picture is your best bet here.
- And finally, how much are your business expenses? Yes, you can claim the internet bill and computer accessories if you’re claiming the freelance income. But if the expenses exceed the earnings, you might not owe Uncle Sam any money. Maybe. I dunno. But you still may need to file a form. Maybe. See why you need to talk to a tax pro?
(3) I can’t stress this enough: Don’t rely on people like me who don’t work as CPAs, CFPs, or bookkeepers for fine-grained advice on how to file your taxes. You need to talk to a professional who can assess all the variables of your individual situation and tell you what to do. Or you need to get a program like TurboTax to walk you through it. Don’t give the IRS a reason to audit you, which would only land you in an accountant’s office anyway.
AFTERTHOUGHT: You may also want to read this post, on business licenses and the IRS definitions of “hobby” and “business.”
Got a question about self-employment or career change I don’t need a financial degree to answer? Ask away.
January 27th, 2008
It’s the most wonderful time of the year (that is, if you’re a CPA). That’s right, folks, tax season is upon us. And not surprisingly, I’ve had a couple requests recently for a round-up of this site’s past posts on paying your freelance taxes.
Before we get to the round-up, I’d like to take this opportunity to remind you that I’m a freelance writer, not a financial professional. Tax laws change every year, and no one knows their nuances better than your friendly tax professional. So although you can get some initial pointers from a freelance blog, I wouldn’t substitute them for the almighty input of someone who’s trained to fill out tax returns. Capiche?
OK, back to our regularly scheduled programming…
Additional resources:
January 24th, 2008
Over the past week plus, personal finance gurus Manisha Thakor and Sharon Kedar, authors of On My Own Two Feet: A Modern Girl’s Guide to Personal Finance, have kindly answered a bunch of questions on this blog, including the one that follows. You can read the previous Q&As here (part 1), here (part 2), and here (part 3). I want to thank Manisha and Sharon for generously sharing so much of their financial know-how on this blog. This concludes the question-and-answer part of the program, girls and boys, but if you want to learn more about Manisha and Sharon’s book, visit their website, OnMyOwnTwoFeet.com.
Annie asks: How aggressive should I be about investing my retirement funds in the current economy? I’m 23 with a brand new 401(k). I know I shouldn’t be afraid to choose riskier options at my age, but I’m worried this option might backfire pretty badly in the short run. I hate to sound like an alarmist, but what do you recommend as far as how to invest during uncertain times? Thanks!
The MBAs answer: Great question! The conflicting economic news these days is enough to make any sane person’s head spin. You are wise to raise this question. The key to answering it is two-fold: (1) This is your RETIREMENT money, and (2) You are VERY YOUNG.
In other words, the money you put in your 401(k) is money you should not plan on touching until you are at least 59 1/2 years old. (Yes, there are certain circumstances where the government will allow you to access that money penalty-free before then. But heck, the point of that money is to fund your retirement, so best to stay away from that cookie jar in the interim.)
As such, you very well may see your balance go up and down — in fact, up and down quite a bit at times. However, until you close in on retirement, until you hit age 50, we think it’s best to keep that investment gas peddle to the floor and stick with those more aggressive investment options. Remember, you won’t be SPENDING that money between age 23 and age 59 1/2, so it’s ok if its upward trajectory is a little wild.
The reason is that no one can predict where the market will go — but when when it does move up, history has shown us that it tends to do so very quickly and with no advance warning. For instance, if you look back over the last 10 years, studies show that 90% of the return you made in stocks came from less than 10% of the trading days. But alas, no one knows for sure which 10% of the days those big moves will come on. That’s why for years smart investors have said investment success is about “time IN the market,” not trying to “time the market.”
Our favorite keep-it-simple option if your 401(k) plan offers it is a target-date retirement fund, which is a mutual fund that will adjust to “right” level of aggressiveness based on your age. But the most important thing is that you are participating in your 401(k). At your age, that puts you solidly in the drivers seat on the path to financial nirvana. Go you!
January 14th, 2008
Last week, personal finance rockstars Manisha Thakor and Sharon Kedar, authors of On My Own Two Feet: A Modern Girl’s Guide to Personal Finance, kindly answered a bunch of questions on this blog. You can read the Q&As here (part 1) and here (part 2). Manisha and Sharon also agreed to answer five questions from you. So far, we’ve only received one (answer below), which means we get four more freebies. If you have a personal finance question for these two Harvard MBAs, post it in the comments by Monday.
Rachel asks: I’d love to hear some advice on how all these savings and retirement ideals fit into credit card debt. My income has stabilized but I’ve got a little debt from starting my business — should I be stashing money anywhere else besides into paying this off?
M & S answer: Ahhh, your question warms our heart. It’s such an important question that we actually devoted a whole chapter of our book (Chapter 10) to it! The short answer is that your goal is to balance the two rather than take an all or nothing approach. Our argument is that while focusing solely on paying down your credit card debt is mathematically the hands-down answer, practically, if you wait to start saving until all your debts are paid off, odds are high you won’t get there. (It’s like saying you’ll start dieting AFTER your local grocery store stops selling premium ice cream in your favorite flavor!) We go into much more detail in our book, but our favorite plan of action is the following:
- First and foremost, make the minimum required payment ON TIME, EVERY MONTH on all outstanding debts.
- Save $2,000 as a “starter” emergency fund.
- If your employer has a 401(k) type plan that offers a “match,” contribute as much as you need to get the full match.
- Continue to build up your emergency fund to at least 3 months (ideally working up to 6 months) of your essential living expenses.
- Now pay more than the monthly payment on any credit card debt. (If your debt is $5,000 or less, pay at least an extra $50 a month EVERY month; if your debt is between $5,000 and $10,000, pay an extra $100 EVERY month; and if it’s over $10,000, pay an extra $150 EVERY month until all that debt is wiped out.)
- Now if you want to buy a home, you can start saving for a down payment.
- If you don’t want to buy a home (or already have one), keep saving for retirement.
One important caveat: These are rules of thumb. The final choice is always up to you. If your credit card debt is making you dry heave every time you think of it, well, by all means swap steps (4) and (5) and accelerate the debt pay-down first. Our primary point is that getting in the habit of saving is like starting to floss your teeth. Once you get going, you wonder how you ever did without. This is why we think it’s so important to do at least a little saving while you are working off your debt. Finally, go you for being interested enough in your personal finances to ask us a question — that speak volumes about your mojo!
Have a personal finance question for Manisha and Sharon? Post it in the comments by Monday.
January 10th, 2008
Yesterday I posted part 1 of my Q&A with personal finance goddesses Manisha Thakor and Sharon Kedar, authors of On My Own Two Feet: A Modern Girl’s Guide to Personal Finance, a book which I cannot recommend highly enough. If I had my way, it would be required reading in every high school, college, and workplace in America. (Who knows how much financial heartache and credit card debt I might have avoided had this book been around when I was in my twenties?)
In today’s post, Manisha and Sharon answer my questions about whether to use cash or credit, managing that blasted quarterly-tax stash, and buying a home as a single, self-employed gal. (You can read part 1 of my interview with Manisha and Sharon here, where we discuss savings and investments.) And if any of you have a personal finance question you’d like Manisha and Sharon to answer, feel free to post it in the comments. They’ll pick five questions to answer on this blog next week.
Q. When it comes to making business purchases for which you have the cash in hand, are you a fan of using ATM cards and checks, or credit cards all the way? I know a lot of freelancers and small business owners try to put all expenses on one credit card to make for cleaner expense records (myself included). Any pitfalls to watch out for?
A. It’s a personal choice — and personally, we prefer using one credit card for all business related expenses provided you always pay off the card on time and in full. Using the credit card can provide an extra layer of protection in case a vendor doesn’t come through with a service (because you can lodge a complaint with the credit card company and stop payment). It also makes for easy record keeping. If the thought of using plastic, however, makes you stay up at night, the world won’t fall apart if you use debit cards or checks.
Q. As a freelance writer, my business overhead is low low low. In the past I’ve had a separate business checking account, but eventually I decided it was a waste of hidden fees and closed it. Is there any reason I should have a business checking account that I’m not thinking of?
A. The main reason to have a separate business checking account if you are self-employed is to help reduce the temptation to spend money you need for work and to keep your record keeping simple. If you’ve got the willpower not to touch money set aside for your work expenses and your record keeping is straightforward, by all means reduce those fees and have just one account.
Q. For years I’ve used a savings account to store the portion of my freelance (1099) income that I need to send to Uncle Sam four times a year for my quarterly estimated tax payments. But I’m starting to think I should be keeping this cash in a money market that has check-writing privileges, where I can earn about 3 percent higher interest. Are there any pitfalls to doing this?
A. So long as the money market is at a reputable financial institution (that means FDIC insured if it’s a bank) or a nationwide presence if it’s a discount brokerage house (like a Vanguard, Fidelity, or Charles Schwab), you’re in good hands!
Q. When I bought a house a couple years back, I had to show the bank three years’ worth of federal tax returns because I was single and self-employed and my income was unpredictable. I remember sitting across the desk from my mortgage broker, wondering if I should have claimed less business expenses on my annual tax returns and maybe taken a little extra work for a year or two before buying the house, just to beef up my business profit margin (and in turn, annual income). Is this a wise strategy for small business owners, especially now that mortgages aren’t as easy to get?
A. It’s a strategy, but we wouldn’t call it wise — we’d call it aggressive. Mortgages that you can’t afford are hard to get these days. But if you are looking to buy a house the “old-fashioned way” — with a 20% down payment, and a 15- or 30-year fixed-rate mortgage — and if you have good credit, you’ll be fine.
Said slightly differently, if you have to contort your finances to get a mortgage, that’s a sign that what needs work is your finances. When you strip away all the media buzz, the truth of the matter is that what’s hard now is to get a mortgage for a house with less than 20% down and/or if you have bad credit. And if that’s your situation, we’d say you’re not ready to buy a house yet. Tough love, but meant to protect the self-employed gal over the long run!
Want more? You can read part 1 of my interview with Manisha and Sharon here. You can buy their fabulous book here. And if you have a personal finance question you’d like Manisha and Sharon to answer next week, post it in the comments. They’ll pick five of the best questions to answer on this site next week.
January 4th, 2008
Seventy percent of Americans live paycheck to paycheck. Sound like anyone you know? Not to worry. My personal finance heroes, Manisha Thakor and Sharon Kedar, authors of On My Own Two Feet: A Modern Girl’s Guide to Personal Finance, are here to answer a few questions about how we can all get our financial rears in gear in the new year, especially those of us who work for ourselves (or aspire to do so).
This is part 1 of my interview with Manisha and Sharon; I’ll post part 2 tomorrow. And if any of you have a personal finance question for Manisha and Sharon, feel free to post it in the comments. They’ll pick five questions to answer on this blog next week.
Q. Many people reading this are likely smarting from their holiday shopping bills. Do you have any suggestions for avoiding a holiday financial hangover in 2008?
A. When you are trying to lose weight, the basic recipe is “eat less, exercise more.” When it comes to staying financially fit in the new year, the same formula applies: spend less, earn more. The best way to avoid a holiday financial hangover in 2008 is to attack both sides of this equation.
In terms of spending less, the obvious place to start is to look through your daily expenses and see where you can cut back. Some not-so-obvious ways to spend less include going shopping in your closet. See if there’s anything you aren’t using that you could sell on eBay. Another idea to spend less is to make sure you actually use those frequent flyer miles or reward points you accumulate; if you don’t have enough for a flight, you can trade them in for merchandise ranging from fluffy bath towels to gardening supplies.
As for earning more, as next year’s holiday season approaches, consider taking on some temporary extra work — retailers, delivery companies (FedEx, UPS, etc.), and catering companies are frequently looking for a little extra help. The combination of the one-two punch of spending less and earning more can have an incredible impact on your overall financial state of mind.
Q. Let’s talk small business. What are your top three personal finance tips for self-employed women?
A. Make sure you have health insurance. One slip on an icy sidewalk and a broken bone could easily set you back $5,000 or more. If money is tight, shop for a high-deductible catastrophic health insurance plan. You can start your search on your own using an aggregator like eHealthInsurance or you can work with a local health insurance broker in your area (you can find one at NAHU.org).
Make sure you have at least a starter $2,000 emergency fund. According to the Consumer Federation of America, the average woman in her twenties and thirties has about $2,000 a year of unexpected expenses yet only $500 in savings. That’s a recipe for stress like you wouldn’t believe. Being self-employed involves enough uncertainty; you don’t also need to be worrying about how you’d pay for a last minute ticket to see a sick relative or a midnight call to the plumber. Our favorite place to stash that fund — savings accounts at online banks like HSBC.com and INGDirect.com.
Know that Money Is the Pink Elephant in the Room. According to the American Payroll Association, 70% of Americans are living paycheck to paycheck. Shockingly, this statistic cuts across income spectrums. As financial guru Dave Ramsey famously says: Act Your Wage! Don’t succumb to peer pressure to live beyond your means. If you feel like money is tight, as often it is when you are starting up a new venture, be honest with your friends and ask them to support your decision to live within your means.
Q. What are the biggest mistakes you see self-employed women making with their personal stash of cash?
A. The biggest mistake we see self-employed women making is not knowing when they should “protect” their cash and when they should “invest” their cash. Our rough rule of thumb is that money you know you need to spend in the next 1 to 5 years should be “protected,” by parking it in an account that generates sufficient interest to offset inflation but doesn’t put your savings at risk. Examples include online savings accounts, money market funds/accounts, and certificates of deposits (CDs).
For money you don’t need to touch for at least 5 years — which for most of us means our retirement money — this is the money you are free to “invest” in riskier options like stocks and bonds. A great keep-it-simple option for this longer term money is target date retirement funds. These are the financial version of the chicken rotisserie “set it and forget it” machine. They have names like “target date 2040″ and “target date 2045,” and the dates correspond to the year in which you will turn 65. The way they work is that a mutual fund company will shift your money between stocks (most aggressive), bonds (moderate risk), and cash (conservative) as you get closer to retirement — so you literally only have to make one decision, to invest your money in the funds. You can get these funds at all the major discount brokerage firms — Vanguard, Fidelity, and Charles Schwab.
Q. Roth, SEP, WTF? Do you have a favorite type of retirement account that you recommend self-employed women open?
A. For the disciplined self-employed woman, our favorite retirement account is the SEP IRA as it enables you to contribute more money than in a simple ROTH. While you don’t get the tax-free status on withdrawals that you would with a ROTH, the ability to set aside a significantly larger chunk of change makes it a classic. However, when it comes to retirement savings, the most important thing is to do it early and often — no matter what type of account you choose!
Q. If a newly self-employed gal isn’t yet bringing home enough bacon to open a retirement fund (let alone pay herself her target salary), should she maybe eat a bit more Ramen and open the fund anyway? Or wait a year or so till she’s more solvent?
A. Eat the Ramen. The money you save early on is the most valuable. Quick quiz: Who has more money at age 65 — the woman who invests $500 a year starting at age 25, or the woman who invest $1,000 a year starting at age 35? Assuming both women’s investments go up 10% a year, the woman who started at age 25 will have $221,000 at age 65 while the woman who started at age 35 (even though she saved more!) will only have $165,000. It’s so important, we’ll say it again: START SAVING NOW are the three most powerful words in personal finance!
Come back tomorrow for part 2 of the Q&A with Manisha and Sharon. And if you have a personal finance question you’d like Manisha and Sharon to answer next week, post it in the comments.
January 3rd, 2008
Boostrapper’s done it again. This time they’ve listed The 100 Best Business Finance Posts of All Time, on everything from funding to spending to money management. Yeah, I’ve got a post on negotiating on the list, but I’d recommend it anyway. Some links I’m looking forward to reading:
You get the idea.
Note: Several of the links I clicked went to blogs with header art featuring career coach types rocking a spiffy business suit and an authoritative gaze looking out over crossed arms. Don’t say I didn’t warn you.
October 22nd, 2007
Childless women “hostile to working mums” In the UK, with maternity leave lasting up to a year and “the right to ask for flex work” now an option, boardroom-bound non-moms see working moms as corporate enemies to be quashed like cockroaches. (I’m paraphrasing, people.) Furthermore, “the Working Mothers’ Report found that 52 percent thought it easier to blame a faulty alarm clock or heavy traffic than to admit that child-care problems had made them late.” (UK Telegraph)
Is she really going out with him? Now that women in their twenties who work full time in New York, Chicago, Boston, and Minneapolis are bringing home more bacon than their male counterparts, they’re fraught with new dating dilemmas (says this article). Specifically, guys who make less and are intimidated by the fact that their girlfriend makes more, or guys who just can’t keep up financially (say, if she wants to go to a pricy restaurant and the opera but he wants to stay at home and swill beer). I dunno, even before researchers were announcing that women consistently made more than men in some age groups/cities, I developed this little dating tenet known as Don’t Date a Moocher, Slacker, Stoner, Agorophobe, or Drunkass Loser. At the same time, I’ve dated a number of respectful, respectable guys who said they’d be happy to be a stay-at-home househubby if we ever shacked up, an idea I rather like since I destest most domestic duties. And I know I’m not the only woman who feels this way. What I’m saying is, this smells like another BS “Style” section trend story. What do you think? (New York Times; now free online!)
Do working women need permission from their employers before getting knocked up? This is an older piece, but worth sharing: “The US has the most limited parental leave policies in the world; conservatives are furious about efforts to catch up.” Of course they are. Rat bastards. (AlterNet)
Too many tchochkes on your desk? Don’t expect a promotion any time soon. “If more than one in five items that adorn a worker’s office or cubicle is personal in nature, others may view that worker as unprofessional.” In case you were wondering, “this is largely an American phenomenon.” (Michigan Ross School of Business)
Mary-Kate (Needs A Steak) Olsen: I don’t just shop, I work hard. The life of a celebrity is haaa-aaard! Sorry, I couldn’t resist. (Fametastic)
September 26th, 2007
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