Freelance Files: Tips about Taxes
Taxes. It’s an uncomfortable topic. Every year new, inexperienced freelancers pay out the nose in taxes because they simply were not educated on how to account for their non-taxed income that had been coming in all year. I myself, was caught in an “uh-oh” position my first year of freelancing. Having made very little, and saved none, I found myself owing money I didn’t have. Here are 4 things I’ve learned in the last 4 years of freelancing.
1) Adjust For The 30% Rule
A lot of us who are new to running our own businesses, get completely blindsided when we find out about that little 30% rule and end up owing thousands of dollars in the beginning of the year. The rule is: for every dollar you make as a freelancer roughly 30% of that will go to taxes. This is called “self employment tax.” It’s the tax employers pay to employ you. When you’re out on your own, you have to pay both the self employment tax and the income tax. Crappy right? This is part of the reason why freelancers usually charge more than in-house designers. Because we don’t have the benefit of having someone pay that employment tax for us.
2) Charge More
Now that you understand one of the drawbacks of being a freelancer, (along with having no benefits, no safety net, no security, etc) you should understand now why freelancers charge more than in-house designers for their services. That being said, don’t fall into this trap:
Client wants to pay you slightly above minimum wage for a certain amount of hours a week ongoing, but she wants it to be called freelance (so that she can terminate the agreement any time, and doesn’t have to pay employer tax). If this sounds familiar, make sure you do the math. If you took 30% out of every paycheck for taxes, would the money left over still be enough to live on? Probably not.
3) Get a CPA
Let’s face it, taxes are NOT our thing. So why trust yourself (or a family member) to be an expert on freelancer taxes? Do yourself a favor and hire a CPA. The money it costs to hire them is worth every penny. They will do your taxes right and they will help you find every single possible thing you could exploit and deduct in order to keep YOUR money in YOUR pocket. When I first moved to chicago, I went to an AIGA even for freelancers and learned about Rockstar CPA, a small accounting company that specializes with taxes for creatives. I knew I had found my answer. I’ve done my taxes twice with them now and have come out positive both times!
I can’t say enough great things about Rockstar CPA. They will even work with you if you’re out-of-state. They have an app and a book called “Minding Your Business: A Guide to Money and Taxes for Creative Professionals”, of which I plan on reading once I move.
4) Document and Organize Your Write-Offs
While CPA’s are professional tax gurus, they are not magicians. In order to help you get the most out of your return, you have to provide them with all the right information. That means you need to document all your tax write-offs.
It is important to develop an organized system so that come April, you don’t have to scramble to remember everything you wanted to write off. Most people keep their receipts in a box, which works well but takes longer to sort out. The last few years I’ve been printing out all my bank statements and highlighting each write-off. I break them down into categories: Education, Tools/Supplies, Marketing, Overhead, Other/Misc. Once I do that I enter them manually into a spreadsheet and add up the totals. This isn’t the quickest way or the most organized way, but its FREE.
If you care to be more official with your write-offs, you can invest in some sort of service like quick books. I use Mint.com for free, because you can tag expenses in similar categories and then mark them as a write off but there’s nowhere that I can see that allows you to print off your reports, so in the end it wasn’t very useful (for me). Whatever you do, develop a system now, so that next January you will be thanking yourself for your organized methods.
But what to write off? There are so many things you can write off that you probably didn’t think of, but here are some common things creatives can write off.
Books/magazines for research
Conference Travel Expenses
Industry Association Memberships (like AIGA or GAG)
New fonts/stock images
Lunches with clients
Website (hosting/domain costs)
Print promotion costs
Office space rent
CPA expenses (YES you can even deduct last year’s cost of getting your taxes done by a professional)
Commuting Expenses (monthly bus pass)
Relocating expenses (move for a new job?)
Of course this isn’t everything! There are still more things you can probably deduct. The take away from all this is that hiring a professional will only guarantee the maximum return. Best of luck!
** NOTE: I am not a tax expert, so please make sure you check with a credible tax professional before taking my advice**