Freelancers are their own bosses. But
they are business-owners, too, and that means dealing with
taxes.
"I thought, 'What's the
benefit? I'm my own boss, and I'm not hurting for
jobs,'" he said. Moreover, he was still covered by his
parents' health insurance.
That happy existence took a blow after
Tim (who prefers not to use his full name due to embarrassment)
visited H&R Block to file his income taxes. He brought the 1099
income statements from every job he worked. The tax preparer asked
if he had paid quarterly estimated taxes. Tim didn't know what
those were. Then he learned the hard way: He owed $8,000 in unpaid
taxes from all those freelance jobs to the IRS.
In Pictures: Eight Money Tips For
Freelancers
Welcome to the world of freelancing. It's a type of work
well known to decades of writers, graphic designers, film editors
and photographers. These days, this form of employment is making
its way into industries where full-time jobs were previously the
norm. It's not surprising to find lawyers, real estate agents,
architects and engineers who are taking freelance assignments until
they find a permanent job.
Like Tim, many workers new to this way
of making a living don't realize that they are going to be
responsible for things that full-time workers never need worry
about.
"Some freelance workers fail to
recognize that they are now basically running their own
business," said Mark Luscombe, a tax analyst at CCH in
Chicago. As such, they must estimate how much they'll owe and
pay taxes that full-time employees have taken out of their
paychecks automatically.
Freelancers will also owe
self-employment taxes. Work for a company full-time, and it is
responsible for kicking in half your Social Security and Medicare
taxes. Go freelance, and you're on the hook for the
entire 
They'll also need to estimate what tax bracket
they'll fall into for the calendar year and take out the
appropriate amount of taxes as well. For example, an unmarried
self-employed lawyer who estimates he'll net $30,000 (after
legitimate business expenses) by the end of the year should figure
on setting aside a bit less than $3,000 for federal income taxes.
The math works like this: A single taxpayer gets to subtract a
standard deduction of $5,700 and a personal exemption of $3,650,
leaving the lawyer with a taxable income of $20,650. The first
$8,350 of that is taxed at 10% and the next $13,300 at 15%.
Don't forget to put aside money for your state income tax too.
You can find your state's rate by going to the Tax Foundation,
a tax research group in Washington, D.C. “
Any freelancer who makes more than
$1,000 a year should plan on paying estimated taxes every quarter
using the IRS form 1040-ES, Luscombe suggests. The IRS requires
estimated taxes to be filed by the 15th of January, April, June and
September each year. If your payment is late or isn't as much
as it should be, the government can charge a penalty of 3.5%, based
on the amount you owe. Underpay by $1,000, and you could be stuck
with an extra $35 fee.
Operating a freelance business has tax
advantages too. You may be able to deduct legitimate business
expenses like business meals, gas and costs associated with a home
office devoted full-time to your self-employment activities. The
IRS publishes an annual list of acceptable business deductions.
States and cities have various rules regarding what you'll have
to do to register your business and qualify for tax deductions.
How to keep all of this straight?
Luscombe suggests that you keep separate bank accounts for your
business and personal expenses. A high-yielding savings account is
one good place to park your estimated tax payments before they are
due.
In Pictures: Eight Money Tips For
Freelancers
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