to the year-end data from companies such as Elance and oDesk, the freelance Web
workforce is stronger today than it’s ever been. This is partly due to an
uncertain economy that has pushed many workers into the freelance business,
while for thousands of others the decision is based solely on lifestyle
matter what the reason, the upcoming tax season will be for many their first experience
filing as a member of the self-employed/sole proprietor/freelance community.
Below are a few general suggestions to help manage the process over the next
two and a half months, as well as some tips for getting a head start on 2011.
a check ready
There’s no sense beating around the bush on this one, here’s the bad news
first. Perhaps the biggest double-edged sword in the freelancing industry is
the fact that your income taxes are not automatically deducted from your
earnings by a traditional employer, as most of us are used to. So when tax time
rolls around, freelancers generally owe 15.3 percent of their net annual
income. If this is the first you’ve heard of this, it’s better to find out now
than when the letter from the IRS arrives a few months from now — a letter
that, unfortunately, many freelancers before you have been shocked to receive.
If you haven’t done so already, start planning today for how you will make that
payment in April.
for 2011: Most seasoned freelancers have set up a budgeting system in which
roughly 30 percent of their earnings are put away for tax payments – as it’s
better to be safe than sorry. Two very wise strategies include putting the
money into a savings account where it earns some interest, or the even shrewder
move is to start a retirement account which can actually lower the amount you
will owe to the IRS the following April. Also, arrange to pay your taxes on a
quarterly basis if four smaller payments are more manageable than one larger
If you’re still with us after the last item, here comes the good news. While
many freelancers overlook the self-employment tax mentioned above, even more
neglect to make the proper deductions they are owed. As sole proprietors,
freelancers incur a wide assortment of expenses throughout the year that they
can rightfully declare at tax time. If you do all of your work at home, for
instance, you are allowed to deduct a percentage of the expenses you put into
your home each month such as rent and utilities. Business expenses on software,
travel (including mileage on your car for business purposes), books and training,
trade shows and networking events, telephone and Internet costs, office supplies,
computer supplies, mailing supplies, postage, etc. are all legitimate
deductions for a freelancer. However, read the word “legitimate” one more time
for good measure, and try to avoid taking deductions for inspirational movies
or food and drink that you believe enhances your creativity.
for 2011: If you are not already in the habit, get in the habit of keeping
every receipt ever given to you. Regardless of the size or the nature of the
expense, this will help condition you so that you don’t find yourself with no
credible evidence of the $1,500 investment you made on your business laptop if
and when the tax man comes calling. Also, note that the end of the year is a
good time for large-scale purchases such as that, especially if you know that
you will need something for your work and can acquire it at the end of a year
rather than the beginning of the new one.
Many freelancers take the previous advice and become diligent
receipt-collectors and invoice-takers, only to stuff said materials in random shoeboxes
with no rhyme nor reason. If you find yourself in this category, don’t wait
until April to try to sort through the piles of papers. Start organizing today,
if possible. And if you don’t any have piles of papers because you keep
everything on a computer, now is the time to start printing everything and
organizing it in an acceptable fashion. Kudos to you, by the way, for trying to
limit the amount of paper you use, but if Uncle Sam is anything it’s definitely
not green. Paper rules when it comes to dealing with the federal government.
Besides, you can keep track of all your printing and ink costs and deduct them
on your 2011 returns.
for 2011: There are countless online bookkeeping tools and accounting software
available for freelancers today, and it may not be a bad idea to explore some
of them if you find that your operation grew at all during 2010. Some of the
best ones to consider include Outright, specifically designed for tax
accounting, LessAccounting, Shoeboxed and Freshbooks.
your local tax laws
This is not to suggest a second career in law, but it’s always a good idea to
do a quick online search into the current laws of your city and state before delving too
deeply into your taxes. Some places have very specific rules about income gained
through self-employment, and 20 minutes of research on the front end can save
you hours of aggravation or even thousands of dollars in cost on the back end. New York City, for example, used to have what it called an unincorporated business tax for freelancers who earned more than a certain amount (I don't know if it still exists), and it behooves you to know those things as soon as possible.
for 2011: If your freelance standing is more than a temporary situation and you
consider yourself a sole proprietor for the long haul, perhaps consider something
more than the 20 minutes online suggested above. Many community colleges and
local public libraries offer fairly in-depth classes and seminars around this
time of year for people interested in gaining more than a passable knowledge of
their state’s income tax laws.
Freelancers often feel like they’re detached from the rest of the world when
they first enter the industry, but nothing could be further from the truth. The
online freelance community is one of the most spirited and loyal groups on the
Web, and people are willing to help each other with just about any situation.
If you read the first item of this post and are still trying to figure out how to
come up with 15 percent of your 2010 freelance income, ask your fellow
freelancers what they did in the same situation. There are scores of great
blogs devoted to the online freelance industry, and the two companies mentioned
in the opening sentence are as good a place to start as any.
for 2011: Aside from your tax questions, most of which will be answered in
short order in discussion groups and forums, make this the year that you really
embrace the freelance community if you haven’t already. At this time next year,
you will find that you not only have a stronger handle on your tax situation,
but there’s a good chance that as a result of joining the community you will
also have more freelance income to declare.