I am taking a bit of a departure from my normal design-related posts to talk about something we all have to do at some point or another: taxes.
There are some things that never get easier with time. For me, those items include cleaning out the fridge, push ups and doing my taxes.
I have been a very happily self-employed freelancer in a creative field on and off for the past 5 years. But, even prior to my self-employment days, I always managed to have a part-time job or two, assorted freelance gigs or would switch jobs halfway through the year to complicate tax matters a bit. I’ve also had my share of painful and expensive tax mistakes in the past simply because there were many things I didn’t understand.
Luckily, now I have someone who shares my DNA to help turn my messy stack of papers and uncategorized expenses into a professional set of documents that would make the IRS proud. My accountant (and sister), Alya Lepp, wrote a quick guide based on some questions she is asked by self-employed people (including myself) every year.
For all you freelancers, I hope this advice helps avoid some of the past mistakes I’ve made.
5 Tax Tips for Creative Freelancers
I am contracting with a company and they asked me to fill out a w9. Does that mean they are taking taxes out?
A W9 form is required by the company you contract for because they need to report your wages to the IRS. Once your complete your contract, they will send you a copy of a 1099-MISC and send the same information to the IRS, so that the IRS will be aware that they should be seeing that money reflected on your tax return.
I’m always confused about what kind of business expenses I can write off. Can I write off lunch? What about my internet when I work from home? What about software like Photoshop or my computer?
You can write off all kinds of fun things! Without knowing your precise industry, I can’t give you super specific examples, but basic categories would include meals and entertainment (this does NOT include lunch you buy for yourself while you’re working), continuing education (we’ll talk more about that later), travel/car expenses/parking, professional subscriptions, software and applications, phone & internet, client gifts, etc. If you can justify it as a business expense, you can basically take anything. However, don’t get greedy: I’ve had clients try to write off business outfits, haircuts, and puppies – those are not allowed. If you’re unsure, do a quick Google search!
The IRS actually provides great resources for this. If you buy a new computer or other piece of equipment, you’ll need to report that as an asset and you can begin taking depreciation on it. Another way to keep your profit down is to take advantage of the home office deduction. If you work from home, you can write off things like rent/mortgage interest, utilities, repairs & maintenance, etc. (you will need to decide how much of your home you can use exclusively as a home office, figure out the square footage of that area vs the square footage of your entire home and calculate it using that percentage).
I am working as a freelancer while working on my Master’s degree. Can I write off any of my tuition?
Tuition is tricky as a business expense. There are a lot of requirements that you’ll have to meet in order to consider it a legitimate business expense. For example, the classes you take have to be a legal necessity to stay in business, or to improve your current skills (not allow you to gain new skills outside of your current field, like an accountant taking a history class). You’re probably better off taking advantage of the Lifetime Learning credit instead.
When should I pay my taxes (quarterly or on April 15) and how much should I set aside for tax day?
You want to pay the IRS every quarter (April 15, June 15, Sept 15, Jan 15). As a self-employed individual, you’ll want to set aside about 30% of your monthly income to pay for your taxes – 15% to pay your individual tax liability, and another 15% to pay your additional responsibilities as an employer (of yourself) for Medicare and Social Security. Here’s where it gets tricky, though. For example, if you’re earning $50k, which means that you’ll have a federal tax liability of $15k, and a Virginia (or whatever state you live in) liability of $2500. However, you’re taxed on your company’s profit and your adjusted gross income, not on the money you actually bring in. So if you have expenses of $10k for the year, your profit is $40k, and your tax liability goes down to $12k. So keep track of your income and expenses every quarter and make a payment based on those numbers. It might be easier in the first year to make the payment at the end of the year in one installment, until you have a better idea of where your profit will lie year to year. You might receive a small penalty for not making proper estimated payments, but it’s also better than paying more than you can actually afford in taxes.
If I don’t receive tax forms from clients at the end of the year, do I still need to declare the income? Also, do I need to declare my part-time job as a dog walker for my neighbor?
You need to report ALL of your income. Whether or not your clients gave you a form or reported it to the IRS. It’s your responsibility to report your income and remain compliant. If a client has paid you under $600 for the entire year, they do not need to file a W9, but you still need to declare it as income. Remember, the IRS has access to your bank accounts and they can see your deposits. You should open up a separate bank account that you use strictly for business income and expenses in order to make it easier to see what kind of profit you should expect at the end of the year. Of course, you can always take distributions from that account and move it to your personal account, but it’s just easier keeping things separate.
If I build a website for a non-profit client, can I deduct the cost of the time it took to create the site? What about doing pro-bono work for a business?
You can’t donate services, just goods or cash. Time is not donateable, but you can deduct miles you drove for charity work. So if you donated your time making a webpage for a qualified charity, you can’t deduct the price of your time or the flat fee. But you can deduct out of pocket expenses and transportation expenses, like if you had to buy a font or a stock photo or something for the page. But you can’t say, “oh, I would normally charge $500 for this” and count that as a donation.