My So-Called Freelance Life - Michelle Goodman [69]
Chapter 16
Pay the Piper
How to not piss off the IRS
“Oh, get bent, taxman!”
—Maggie Gyllenhaal in Stranger Than Fiction, 2006
If you’ve never filed taxes as a freelancer before, it can be almost as spooky as watching The Shining alone in an empty house at 2:00 in the morning. But unless you want to follow in the footsteps of Leona “We Don’t Pay Taxes” Helmsley (read: take an extended trip to the pokey), I suggest you listen up.
I won’t lie to you: Paying your taxes as a self-employed person is a pain in the ass. As I said earlier in the book, we freelancers pay our taxes directly to the feds in estimated quarterly tax installments throughout the year; our clients don’t take taxes out of our checks the way a 9-to-5 employer would. There’s also a lovely little thing known as the self-employment tax we get to contend with, which basically means we pay both the employer and employee portion of our social security bill, amounting to about 15 percent of our annual freelance income.
As I mentioned in Chapter 4, I recommend hiring an accountant or CPA right away. Not only are they experts in deciphering hundreds of tax forms, it’s their job to keep up on the ever-changing permutations of tax law. Yet many new freelancers try to cut costs by paying “a friend who’s good at math” $100 to do their taxes. Unfortunately if that friend doesn’t know diddly about freelance tax law, you could wind up being slapped with interest for underpaying Uncle Sam, as has happened to a couple of newbie freelancers I know—meaning you’ll just wind up paying an accountant a few hundred bucks to help clean up the mess anyway. Besides, the annual fee you pay your tax preparer is an expense you can write off.
In Chapter 4, I also recommended hiring a tax professional who’s experienced at working with freelancers, artists, or self-employed folks in your line of work. You don’t want a tax preparer who only works with fifty-employee firms. You want someone who knows how to help an independent professional like you play by the rules and save as much as you can on your tax bill. For recommendations, one email to your favorite discussion list or post to your preferred web community usually does the trick.
For simplicity’s sake, I’m going to assume in this chapter that you’re running a sole proprietorship (an unincorporated business of one) as opposed to a partnership, corporation, LLC, or any other business entity. If you’re not a sole proprietor, some of the advice in this chapter may not directly apply to you—except for my insistence that you hire a tax adviser immediately if you have not already done so.
Show Uncle Sam the Money
I’m no tax or financial professional myself, but I’m happy to give you the basics of what I’ve learned from my umpteen years of paying the IRS as a self-employed writer. Rule number one: Sock away a percentage of every dollar you earn until your estimated quarterly payments come due to the IRS on April 15, June 15, September 15, and January 15. Take it from someone who learned the hard way: Don’t spend this money. Just pretend it isn’t yours (because technically, it isn’t) and put it in an interest-earning savings account until it’s time to fork it over.
While the IRS doesn’t require sole proprietors to open a business bank account, stashing your tax dollars in a savings account other than the one you keep for personal use is a good idea. You’ll be less tempted to touch it. Since many banks charge higher fees for business accounts, just open a new personal account. If you’re good about paying off your credit card bills each month, I suggest getting a separate credit card you can use for all your business expenses, too. It’ll help you keep cleaner records. Who knows? You may even earn enough points for a new coffee maker.
How much should you save? “Plan on a minimum of 25 to 30 cents on