I Learned the Hard Way That Doing Taxes Is Totally Different As a Freelancer

Pretending like taxes don’t exist will only make things more complicated when tax season rolls around. Trust me, I know.

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Jan 24 2019, 9:55pm

Illustration by Jackson Gibbs

I actually used to like filing my taxes. I had one job, one W-2, and a TaxSlayer account. But after becoming a full-time freelancer last summer, my taxes seem daunting—especially since I was too stressed, poor, and lazy to figure out exactly what I should be doing to keep the IRS off my back and avoid going broke come April.

In an effort to put on my big girl pants and make this work, I spent the last week talking to experts to get the answers to things I’m too embarrassed to ask. (I only cried once.) Here’s everything I learned—sometimes the hard way.

Taxes aren’t taken out of my checks—but I still have to pay them

When most of your income arrives in the form of untaxed checks, you can’t just wait until April 15 of the next year to figure out what you owe. Instead, you have to estimate the taxes and pay them every quarter, including an extra self-employment tax.

It’s embarrassing, but I didn’t even know quarterly payments were a thing until I started writing this article. Turns out they’re Freelancer 101, and I’ll owe the IRS some money if I underpaid my 2018 taxes by 15 percent (a shift from the standard 10 percent due to tax reform). Cue extreme anxiety and penny pinching.

You see, when you’re an employee, your company takes money out of each paycheck to cover your federal income tax, Medicaid, and Social Security. If you’re self-employed, a $350 project means a $350 paycheck; your client won’t subtract taxes from your pay.

I’ve since learned that setting aside 25 percent of what I earn is a good rule of thumb. This super simple calculator from TaxAct gives a better estimate based on income. You can use your tax or accounting software to make the exact calculations or follow the IRS instructions on their site for free and submit your payment vouchers using the 1040-ES form.

Having a separate bank account and credit card for work is a life saver

I don’t like having a lot of accounts to keep track of, so when an accountant I spoke with suggested opening a separate credit card and bank account for my business, I pushed back.

I finally gave in after learning that it would make my income and expenses easier to track and would potentially keep the IRS at bay. I opened a business-specific bank account and got the Chase Sapphire Reserve, the credit card I keep writing about, but didn’t have until now. Any money I earn from freelancing flows into my business bank account and I put any work expenses on my new credit card. Having my work income and expenses separate from my personal stuff keeps my records clean in case I was ever audited.

Tracking my income and expenses is no longer optional

In order to figure out how much money I have to pay in quarterly taxes, I need to know how much money I’m bringing in. This is where programs like Wave (free) and Quickbooks ($10 a month) come in. I’m using Quickbooks’ Self-Employed program, which I linked to my new bank account and credit card. I go through every earning and expense to determine if its business or personal. The program also estimates my quarterly taxes and lets me pay them directly through the site.

“It’s hard to make a living and keep records and keep receipts because no one wants to wake up and balance their books,” says Susan Lee, a certified financial planner in New York, NY who specializes in preparing taxes for freelancers. “You have to set aside part of your life to do that.”

I get way more deductions than I did as an employee

I never used to itemize when I was an employee. Why bother? But now, even though calculating expenses and deductions is confusing, they’re also my new best friends. That’s because they lower my taxable income so that I “made less” in the eyes of the IRS, which in turn lowers the amount of money I owe in taxes. "Don't hesitate to take deductions that you're eligible for,” TurboTax’s Lisa Greene-Lewis told me.

I can write off my new printer, part of my trip to Argentina (since I wrote about it), and a portion of my cell phone bill. I can also write off health insurance premiums and any classes I take to help progress my career. The IRS guide to deducting business expenses has a complete list of deductions.

Sure I could skip itemizing and just take the new, higher standard deduction this year—$12,000 for single people or $24,000 for married people filing jointly—but if I can get a bigger tax break by itemizing, I’m all about it.

I’m taking the new 20 percent business deduction

Starting with the 2018 tax year, businesses are eligible for a 20 percent tax break. It’s based on profits, so if you earned $15,000 in 2018 (after writing off business expenses) you could get a $3,000 deduction.

I wasn’t sure if I was eligible for this new tax break since I haven’t incorporated my business, so I asked Mike Slack, lead tax research analyst at H&R Block’s Tax Institute, to clear things up: “Anyone who has a side hustle or is a sole proprietor will qualify for the deduction,” he said. The big caveat here is that I need to have earned less than $157,500 a year, which, unfortunately isn’t going to be a problem for 2018. Here’s hoping next year I won’t qualify!

I may be able to deduct my home office—err, nook

If you have a dedicated workspace in your house or apartment that you use exclusively as a home office you can take a home office deduction. The IRS is strict on this one, though. “The exclusive use rule is the hardest part of the home office test to pass. If you use [the space] for anything other than your home office for business use, you can’t deduct it,” Slack told me.

I have a 200-square-foot nook in my apartment that I use solely as my home office so I’m hoping to deduct around $1,000 for that. Here’s the IRS page on how to calculate your deduction.

I’m getting help on my taxes this year

If you’ve been keeping tight records and don’t have a ton of 1099s, there are cheap, reliable software programs that have specific offerings for people who are self employed. My old standby, TaxSlayer, is $47 for the self-employed version while TurboTax is $90 and includes Quickbooks.

But I’m bringing in a pro, mostly because of my lack of planning (and missing two quarterly estimated payments for 2018). A friend referred me to a local accountant to help sort things out and get me on track for 2019. I’m paying her $220. If that’s too much money, but you want the extra support, TurboTax’s CPAs and enrolled agents can review, file, and sign your tax return and offer year-round support for $160. Or you can schedule an appointment with H&R Block or another tax service.

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