Tax Tips for the Freelancer
If you're one of the many freelancers and small-business owners who wait until the last minute to file your taxes, there's good news in 2011: Tax Day is April 18 this year, which gives you three extra days.
Ready for the bad news? That's less than a month away.
I can understand the reluctance to get going. I had most of my documents in one file, but still had to hunt down a couple of receipts and papers. And unlike my days of being a salaried employee, I knew I was going to be the one writing the check to the IRS, not the other way around. Hunting for paperwork, preparing a return, and writing a big, fat check at the end of it? Ugh, I'll do it next weekend.
But Tax Day looms, and if you have freelance income to report, your taxes are going to be more involved than someone who only has a W-2. When my taxes started to get more complicated, I had a lot of questions. I imagine most freelancers have similar concerns, so I've put together some general tax questions for folks who freelance or run a small business. Use them as a jumping off point to get going on your return.
I made a few hundred dollars on a side project. Do I have to report it?
If you had net earnings from self-employment of $400 or more, you have to report it on a Schedule SE (Form 1040). Also, know that even if a client didn't send you a 1099-MISC (used to report miscellaneous income of $600 or more paid to a non-employee), you're still required to report the income.
Do I need to file a Schedule C?
Schedule C is the tax form filed by most sole proprietors to report profit and loss. Freelancers, self-employed taxpayers with small or start-up businesses, and new business owners who made little or no profit might file a Schedule C. There's also a shorter Schedule C-EZ, Net Profit for Business, for self-employed individuals with less than $5,000 in expenses, no employees, and no net losses.
You can find general instructions for a Schedule C on the IRS website.
If I'm self-employed. Can I deduct my health insurance premiums?
You may be able to deduct medical and dental insurance premiums and long-term care insurance for you, your spouse, and your dependents if you're reporting a net profit reported on Schedule C, Schedule C-EZ (Form 1040), or Schedule F.
The insurance plan must be established under your business, which can be either the name of your business or your name for self-employed individuals. Refer to Publication 535, Self-Employed Health Insurance Deduction for more information.
Can I claim a home-office deduction?
If you use part of your home for business reasons, you may be able to deduct expenses for mortgage interest, insurance, utilities, repairs, and depreciation. This applies to homeowners and renters alike.
Although the home-office deduction is considered one of the Publication 587, Business Use of Your Home.
Can I deduct my laptop?
The rule is that business expenses must be both ordinary (common in your line of work) and necessary (meaning helpful and appropriate, not that the expense must be indispensable).
If your laptop is used for your freelance or small business, it can be deducted; however, if you use it partly for conducting business and partly for personal purposes, you can only deduct the percentage of the expense as a percentage of how much it's used for business. For example, if you bought a laptop that's used 60% of the time for personal reasons and 40% for work, you can only deduct 40% of the value of the computer. Refer to chapter four of Publication 535, Business Expenses, for more details about deducting interest and allocation rules.
Do I need to start filing quarterly estimated tax payments?
If you're filing as a sole proprietor or a self-employed individual, and you expect to owe $1,000 or more when you file, you should be making estimated tax payments.
You can estimate your taxes using your income, deductions, and credits for the prior year, along with worksheet in Form 1040-ES [PDF]. If you estimate too high, you'll complete another Form 1040-ES to recalculate your estimated tax for the next quarter. If you estimate low, you'll do the same thing to reconfigure what you owe next quarter. Visit the IRS's Estimated Taxes guide for more information about how and when to file quarterly payments.
I hired a worker. How do I know if he or she is considered an employee?
In most cases, an employer must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on income earned by an employee. Independent contractors, on the other hand, pay these taxes themselves.
The guidelines to determine if someone is an employee or an independent contractor aren't black and white. Instead, the following factors are used to determine the degree of control and independence of the worker:
- Does the company determine how, when, and where the work is performed?
- Does the company determine how a worker is paid, whether or not expenses are reimbursed, and other financial matters?
- Is there a written contract or employee benefits, such as health care?
If, after examining the relationship with your worker, you're still unsure, use Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding [PDF] to have the IRS determine the status for you.
Here are a few more tips:
- Be honest about your income.
- Keep receipts and any supporting documentation to back up your deductions.
- Use tax preparation software or a tax professional.
And finally, get started today. If you wait until the eleventh hour, it'll only make doing your taxes more stressful!