Tag Archives: freelancing

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Estimated Taxes: Sailing in the Safe Harbor

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This (2008) is my first year working as a full-time freelancer. Last year my taxes were so complicated due to partial W2-ing and some freelancing that I probably missed a few deductions I was entitled to.

Next year, I’m hiring an accountant in April to do my taxes.

But – I really don’t want to spend an extra $300 now for a tax counseling session. I feel like there’s enough information online and in books to prep me for everything I need to know. The problem is I’m already, uhm, four months behind (how did it get to be April already???)

The good news is that I’ve discovered one benefit to being a freelancer and having to pay taxes. No, it’s not that pesky little 15.3% self-employment tax that salaried folk don’t have to pay.

It’s the safe harbor estimated tax “benefit.”

As a freelancer, you have to pay estimated tax payments four times a year (there are a few exceptions for people making not that much money, etc, but I’m referring to freelancers that make a living wage).

In 2008, the estimated tax payments are due:

April 15, 2008
June 15, 2008
Sept 15, 2008
Jan 15, 2009

According to numerous articles I’ve read on the ‘net, when it comes to estimating your taxes you have a choice. You either have to pay 100% of last year’s tax that you paid (110% if you make over $150k) or 90% of your estimated 2008 earnings.

If you’re earning more this year then you were last year, unless you can’t control your spending and keep your tax payments safely in a high-interest savings account, there’s no reason that you should chose to pay based on your estimated earnings for the upcoming year.

Why’s that?

You want to have control of your money for as long as possible. You can either turn it over to Uncle Sam and let him make money off of it throughout the year, or you can keep it in your high-interest savings bank account like ING Direct (don’t invest it in stocks, please, you don’t need to lose it all before you owe it), gain a little interest as the year progresses, and pay up in the end.

As long as you carefully save for tax season, the huge chunk of money you have to turn over to the government won’t come as such a shock.

So that’s my plan this year. Last year my total tax (found on line 63 of your federal return) was $4,300, which breaks down to $1075 per quarter.

I know that my 2008 taxes will be much higher than $4,300 (or will they – it depends on how long I keep my contract job. Maybe I’ll end up making much less the second half of the year anyway). Either way, the IRS doesn’t care as long as you take the “safe harbor” route of estimated tax payments.

Plus, that means I don’t have to worry about figuring out my deductions now, for better or worse.

I would like to figure out how to get a home office deduction. Maybe it means I have to move to a place that has a separate room that I can call my office. My rent, which is currently $1050 a month for a studio, is going up in July. I don’t know how much, but probably enough to have me out and about looking at other apartment options. I’ve lived here for two years and really don’t want to move – but if the price of this place and another place that’s more or less better suited for taxing a home office deduction cost about the same, I probably should move.

But I’ll deal with that in a few months…

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Finally Did My Taxes

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So you know how I wrote that I was going to do my taxes a few days ago?

Well, I kept putting it off. I knew I was going to owe something… I just didn’t want to face how much I would owe.

The bad news is that it turns out I owe $1234. I probably could have gotten that number down a little bit by taking more deductions but at this point I just want to put last year behind me and start fresh with this year, being really careful about recording anything I can deduct legally as a self-employed person.

What really sucks is that since I live in a studio, I can’t take a home office deduction. Well, I guess I could cut off a corner of my room from the rest of my apartment and not go into it unless I’m doing work, but that would be rather silly. Or at least I think it would be silly – a tax professional might think otherwise?

Regardless, I knew I was going to owe a lot this year because I had a decent amount of freelance income last year that hadn’t been taxed at all.

This year I’ll owe much, much more since I’m sans the W2 life, but at least now I’m trying to be careful figuring out what I owe out of everything I make. It’s better to tally it up that way. With last year’s taxes, I’ve been entirely in the dark.

So I used H&R Block’s TaxCut online software. The basic version. I went through the whole nine yards w/ TurboTax and then decided to check out what I’d owe with TaxCut and since it was pretty much the same in the end I just filed w/ TaxCut. My login session for TurboTax had already signed out and, well, I forgot my login name.

I just wish there was a way to find out if a CPA could really get me more deductions… but it seems unlikely. I mean, how many deductions are there that are so hidden only those training in tax legalize can understand how to save money?

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Taxes, Taxes, Oy, Oy, Oy.

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It’s time to do my taxes. I am not waiting until April 14 to sign on to TurboTax and try to figure things out. It’s bad enough I waited until April 4.

The big reason I want to finish my taxes “early” (ha!) is so I can figure out what my estimated quarterly tax payment should be for 2008. I realized that since I can’t afford to pay what I’d owe based on my expected yearly income (which may be way off anyway, depending on whether I can keep my current contract gig or not into the rest of the year) so I’m going to do the 110% of my taxes paid for last year.

I will have to be careful this year to “oversave” for taxes based on a 40.6% tax rate (probably the highest I’d have to pay if I indeed make as much as I could make this year) and keep the extra in an un-touchable savings account so I can send it off on April 15, 2009 without much fuss.

I’ll be reporting back on my experience filing my last year’s taxes throughout the day. Wish me luck!

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How to Afford My Quarterly Taxes

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I assume that I’m going to owe $6132 in quarterly taxes (state and federal) in… 14 days.

(AHH!)

I just transfered an extra $1000 into my ING for Taxes account, which now adds up to $5125.56

So I’m short $1006.

That means budgeting this month needs to be extra, extra tight. And I might have to dip into my liquid CD to pay my estimated quarterly tax.

—-

April “Spending” Money $2410

Fixed Costs = $1422.28
————–
$71.33 — Cable Bill
$129 — Health Insurance
$87.33 — Car Insurance
$57.62 — Phone Bill
$1050 — Rent
$27 — Gym Bill

Credit Card Debt: $882
to pay this month $500
———————————

$1922.28

———-

$487.72 left

Food? Taxes? Gas?

——–

The Good News…

Still Owed for this month: $1325

($400 for marketing copy
$525 for marketing article
$400 reimbursement)
[[+487.72]]

(TOTAL: $1752.72)

If I get paid all of this in time…

$1300 to taxes
$200 to food
$100 to Roth IRA
$152.72 Stays in Checking

————————————–

Why am I so short? I shouldn’t be this short, but it will take me until the end of April to earn all the money I need to pay for my Jan – April estimated taxes. I could just pay less than I’m supposed to and hope that it all works out in the end. This isn’t entirely a stupid thing to do because I think based on last year’s taxes I could undershoot what I’m going to have to pay this year and still be penalty free. But I’d rather keep on top of things.

Also, none of this takes into consideration the fact that I have to pay to deal with 2007 taxes.

What have I done, oh what have I done????

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Estimated Tax Worksheet – could it be any more complicated? (Don’t Answer That)

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Ok, going by the estimated tax worksheet, perhaps I owe a different amount for this quarter.

1. Adjusted gross income you expect in 2008:

(Adjusted gross income. Use your 2007 tax return and instructions as a guide to figuring out the adjusted gross income you expect in 2008. see Expected AGI — Line 1 in chapter 2 of Pub. 505 — “Your expected AGI for 2008 (line 1) is your expected total income minus your expected adjustments to income”)

Let’s just say $66,000 and forget any adjustments I might take.

2. Estimated total of itemized deductions: no idea

3. Subtract Line 2 from Line 1: $66,000

4. Exceptions: Multiply $3,500 by the number of personal exceptions = $0?

5. Subtract line 4 from line 3 = $66,000

6. Tax =
Figure your tax on amount on line 5 by using the 2008 Tax Rate Schedules on page 5. *If you have qualified dividends or a net capital gain, or expect to claim the foreign earned income exclusion or housing exlucsion, see “pub 505” to figure the tax.

  • 10% on income between $0 and $8,025
  • 15% on the income between $8,025 and $32,550; plus $802.50
  • 25% on the income between $32,550 and $78,850; plus $4,481.25 = $12843.755
  • 28% on the income between $78,850 and $164,550; plus $16,056.25
  • 33% on the income between $164,550 and $357,700; plus $40,052.25
  • 35% on the income over $357,700; plus $103,791.75

7. Alternative minimum tax from Form 6251: (this AMT confuses me to no end so for now I’m going to pretend it doesn’t exist and hope it doesn’t effect me.

What is the AMT? The AMT came into being with the Tax Reform Act of 1969. Its purpose was to target a small number of high-income taxpayers who could claim so many deductions they owed little or no income tax. A growing number of middle-income taxpayers are discovering they are subject to the AMT.

8. Add lines 6 & 7. Add to this amount any other taxes you expect to include in the total on Form 1040, line 44, or Form 1040A, line 28 = $12843.755

9. Credits (not not include any income tax withholding on this line): huh?

10. Subtract line 9 from line 8. If zero or less, enter 0 = $12843.755.

11. Self employment tax. Estimate of 2008 net earnings from self employment. (if $102,00 or less, multiply the amount by 15.3% — Caution: If you also have wages subject to
social security tax, see Pub. 505 to figure the amount to enter) = $10,098

12. Other taxes (see instructions below): let’s just say none.

13a. Add lines 10 through 12: $10,098
b. earned income credit (forms 4136, 8801 (line 27) and 8885) – None (you have to earn less than $17k for this.)
c. total 2008 estimated tax. Subtract line 13b from line 13a. If zero or less, enter 0 = $22,941.755

14a. multiply line 13c by 90% (unless you’re a farmer or a fisherman, then it’s 66.5%) = $20,647.58
b. enter the tax shown on your 2007 tax return (110% of that amount if you are not a farmer or a fisherman, and the adjusted gross income shown on that return is $150k or more) = no idea yet
c. required annual payment ot avoid a penalty. Enter the smaller of line 14a or 14b = $20,647.58

15. Income tax withheld and estimated to be withheld during 2008: none.

16a. subtract line 15 from line 14c:
Is the result zero or less?
Yes — stop here. you don’t have to pay anything.
No – go to line 16b…

16b: subtract line 15 from line 13c
is the result less than $1000
yes – stop. no money needed.
no – go to line 17 to figure your required payment

17. if the first payment you are required to make is due april 15, enter 1/4 of line 16a:
$20,647.58 / 4 = $5161.89

(but this doesn’t at all include state taxes. I wonder if there is a separate quarterly estimated tax payment for that.)

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Freelance Life: Estimated Quarterly Taxes

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I may be way off on this… but my calculations amount to an:

Estimated Quarterly Tax: $6,706

Without the help of a CPA, I’m trying to figure out my estimated quarterly tax payment. My calculations, while likely closer to accurate than I’d like to believe, are definitely more than I have in my “for taxes” saving account.

The good news is that for this year at least, I’m allowed to put 90% of my previous year’s taxes into my estimated tax payments each quarter. And last year, since I was working full time and making much less money, my tax payments for the year were not that huge. I think… and please correct me if I’m wrong… that as long as I pay 90% of last year’s taxes (divided by four) then at the very least the government won’t be charging me any penalty fees.

Regardless, I probably should try to just pay 100% of my estimated tax to avoid a really awful April 2009.

That said… I’m trying to understand these calculations, without figuring out my deductions (since any deductions I can take will just mean that I can get a refund. And I’d rather just get a refund than deal with sorting out deductions each quarter. It’s hard enough to do it once a year!)

—-

Tax Guestimates

Assuming I make $5500 a month for the entire year (I’m overestimating given that I’m making about $5000-$5300 now in any given month… some months I make more.)

TOTAL TAXES = $26,821.362 (or 40.6% of $66k yearly income)

FEDERAL
[$8025 at 10%] $0 – $8025 = $802.50
[$24524 at 15%] $8026-$32550 = $3678.50
[$33,449 at 25%] $32,551 – ($78,850) $66,000 = $8,362.25

Total Federal Tax: $12,843.25

STATE

0% $0 – $6828 = $0
[$9357 at 2% ] $6829 – $16186 = $187.14
[$9358 at 4%] $16187 – 25545 = $374.32
[$10,005 at 6%] $25456 – 35461 = $600.30
[$9353 at 8%] $35462 – 44,815 = $748.24
[$21,184 at 9.3%] $44816 – 66,000 = $1970.112

Total State Tax: $3880.112

SELF EMPLOYMENT TAX

[$66,000 at 15.3%] = $10,098

Total Self Employment Tax: $10,098

—

Estimated Quarterly Tax: $6706

—

Eeks!!! $6,706?

I’ve only saved about $4,500 for this quarter’s taxes. Well, I’ll really be saving more like $6,500, but I don’t get paid until the end of the month, so the next $2,000 I’d put away, which would be for my March-April “month” of work ending April 20, will not be paid until the end of the month. So how am I supposed to pay that in advance?

I’m so, so, so confused.

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My Favorite Time of the Month

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Both of my paychecks arrived in the mail, so I finally got around to driving over to the bank and handing them to a teller. While I’m too modern for most old-fashioned interactions, financial or otherwise, I have to say I enjoy going to a bank and depositing my checks.

I found with direct deposit, I stopped paying attention to when money was going in… and when money was coming out. For some reason, actually filling out a deposit slip and asking the teller to put it into my checking account feels, well, it feels like my monthly celebration (albeit in my head) for all my hard work. It makes me feel like an adult, perhaps.

In any case, these days I don’t have a direct deposit option. At least now the reason for this makes sense. At my first salaried job the company didn’t do direct deposit because the whole company had money problems and the big boss was afraid of paying everyone’s paycheck at one time. Yea, I’m kind of glad I left that company.

Nowadays, though, as a freelancer, it’s even more unlikely for a company to offer direct deposit. And that’s fine. Even though checks are easier to lose or to forget to deposit, they’re still getting something on paper for all your work. That paper isn’t worth much until it’s turned into a bank, so many would say my desire to be paid by check is absolutely ridiculous. Still, it’s kind of nice, to go to a bank, when they’re not busy, and wait for the transmission of money to take place.

Slowly down that process maybe helps me slow down on my spending too. Just a bit.

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The 60 Hour Freelance Work Week

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While working 60 hours at a salaried job each week seems beyond boring, diversifying one’s time and one’s ongoing work portfolio can lead to professional fulfillment on many levels, including by not limited to one’s bank account.

I recently found out that in order to be a full-time salaried employee at my current company, I need to sign on for 50-60 hours a week. While I love my job AND the company, that’s still not enough to have me sign every possible work hour away to one job.

Besides boredom, the reason to keep my ‘after 40’ job hours open is because some of my other opportunities pay much better than what I’m spending most of my week on. At my 40 hour per week job I make about $27 an hour right now. But I’m also taking my late evenings to work as a freelance marketing writer, with projects I’m getting paid $50 per hour for.

I’m not sure what my value is as a full-time employee versus freelance, but for some reason I feel like my $50 per hour charge as a freelancer is justified, while I could never imagine asking my freelance full-time employer for such a raise.

When it comes down to it, I’d rather make slightly less at my “day job” and use the opportunity to pitch my writing skills for extra income that ultimately covers health insurance and other things I need.

That brings about the question… how much can I actually make in one month without not sleeping and going completely insane…

Monthly Potential Income
1. $4800 — Gig 1. 40 hours per week (on contract)
2. $400 — Gig 2. Approx 8 hours, or 4 projects per month at $50/hr
3. $250 — Gig 3. 10 hours of administrative Work at $25/hr
4. $400 — Gig 4. 8 hours of research & article writing at $50/hr
—————————————————————————–
$5850 per month

Which is a lot of money. Sort of.

Minus $2340 ((40% taxes (25 % tax bracket + 15 % self-employment tax))) that comes out to a grande total of…

$3510 per month after taxes, or a net income of $42,120 per year.

That’s still pretty good, I think.

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Freelancer Woes: Taxes, Taxes, and More Taxes

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While I’ve gone through periods of working part-time gigs and freelancing for a little extra cash on the side, 2008-2009 will be the first year when I’m likely going to be a contractor all year long. I love the freelance lifestyle, as I can finish my work hours when everyone else is asleep, or get all my hours done straight through and leave myself time to relax for an extra weekend day, if possible. There are so many things I love about being a freelancer (albeit one with a stable freelance gig) that I’d be hard pressed to give it up.

One thing that might, just might be able to get me to give this wonderful lifestyle up is taxes.

Just trying to figure out how to sort out my taxes owed as a freelancer seems like a giant nightmare. On top of that I now have Prosper taxes (which sounds like it will be worse than a nightmare to file) and my various stocks, ETF and mutual fund accounts to tax…

Originally I thought sorting out my taxes would be simple as taking 25 percent of all my income each month and putting it into a highish-interest ING savings account. Come tax time, my tax money will have made a little money (although that will be taxed to) and if all worked out as I originally thought, the money in that account would certainly cover all my state and federal taxes… plus I would have saved some money by holding off on paying it throughout the year.

Given that I finally stopped to smell the dead roses, I did a little research and found out about the “Self Employment Tax” which seems to be another 15.3 % on top of the 25%. So does that mean I should be putting 35% of my income each month into my ING “for tax season” account?

And then… apparently freelancers are supposed to pay an estimated tax each month. What I don’t understand is if this is for the convenience of the freelancer (don’t have to worry about spending all your tax money and being in serious trouble come April 15) or if it’s actually required by law to pay taxes on a monthly basis instead of in one lump sum at the end of the year. If it’s not illegal, I really don’t understand why more people wouldn’t just do what I think I’m doing with this savings account and getting a few extra dollars on the money that will ultimately go to the IRS at the end of the year. But maybe I’m thinking about this all wrong.

I’m, quite frankly, terrified of tax season next year. This year is complicated enough with my two full-time jobs and freelance earnings. But next year? Well, I know I’ll have to hire an accountant. But what is it I should do now, as it starting 1.5 months ago, to make my life bearable next year… and more importantly, so I don’t accidentally end up in jail for tax fraud out of ignorance and confusion?

ps: I think I just found my answer… (I guess I do have to pay in advance!!!)
http://www.irs.gov/publications/p505/ch02.html#d0e5923

——————————————————————————————————
(Thanks to the IRS for explaining, in fairly clear language, how I can give them my money)

When To Pay Estimated Tax

For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return. The payment periods and due dates for estimated tax payments are shown below.

For the period: Due date:
Jan. 1 1 – March 31 April 15
April 1 – May 31 June 15
June 1 – August 31 September 15
Sept. 1 – Dec. 31 January 15
next year 2

1If your tax year does not begin on January 1,
see Fiscal year taxpayers, below.
2See January payment, below.

Saturday, Sunday, holiday rule. If the due date for an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next business day. For example, a payment due on Saturday, September 15, 2007, will be on time if you make it by Monday, September 17, 2007.
January payment. If you file your 2007 Form 1040 or Form 1040A by January 31, 2008, and pay the rest of the tax you owe, you do not need to make the payment due on January 15, 2008.

Example.

Janet Adams does not pay any estimated tax for 2007. She files her 2007 income tax return and pays the balance due shown on her return on January 24, 2008.

Janet’s estimated tax for the fourth payment period is considered to have been paid on time. However, she may owe a penalty for not making the first three estimated tax payments. Any penalty for not making those payments will be figured up to January 24, 2008.

Fiscal year taxpayers. If your tax year does not start on January 1, your payment due dates are:

  1. The 15th day of the 4th month of your fiscal year,

  2. The 15th day of the 6th month of your fiscal year,

  3. The 15th day of the 9th month of your fiscal year, and

  4. The 15th day of the 1st month after the end of your fiscal year.

You do not have to make the last payment listed above if you file your income tax return by the last day of the first month after the end of your fiscal year and pay all the tax you owe with your return.

—————————————————————————————-

Ok, now I just have to figure out exactly how much I have to pay them. Hmm.

Here are some helpful links I’ll be reviewing to help me figure out just that, and I’ll report back here when I actually understand what I’m talking about:

1. Write From Home: Taxes for Writers: Paying your Estimated Tax
2. Huge Taxes for Freelancers?
3. California Tax Service Center

Once I do understand all this, I can work as a freelance freelance accountant. 🙂

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10 Reasons Why I Love My Freelance Job

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I work for a web startup in Silicon Valley on contract, about 40 hours per week.

10 Reasons I love My Job:

1) The people I work with are passionate, fun, and great collaborators working together to create something new.

2) My job tasks are diversified and include many things I’m interested in, such as writing, community management, UI, and QA.

3) The room to grow at my company is only limited by my skills and interests.

4) I get paid a very decent monthly wage for the opportunity to do something I love.

5) Because I’m on contract, I get the flexibility I need to pursue my other passion: theater directing in the evenings and on weekends. I’ve applied for numerous web startups, but most wanted me full time at 60+ hours a week. If I had no life outside of my job, I’d be happy to take this on. However, I need to have balance in my life. I don’t mind sacrificing company-sponsored benefit plans, sick days, holidays and stock options if it means I can keep doing what I love AND have a job I love.

6) While I don’t have a lot of time to do “other freelance projects,” I have a few hours a week that I can move around to take on some extra work. I like to continue freelancing on additional projects because it’s always good to have side income in case your full-time (or in my case, 40 hour per week freelance) gig goes kaput.

7) Free lunch on Mondays!

8) I feel appreciated. My ideas are not always used, but at least they’re considered. People seem to respect me. That’s the most important thing in making me feel satisfied at a job.

9) Flexible schedule and work location. I work from the office 2-3 days per week and I work from home the rest of the time. I find I actually do more work when I’m at home because I can focus. I’m also not anxious like I was at former jobs where I just didn’t feel smart/competent/knowledgeable enough to feel comfortable yet still challenged in the position(s).

10) My job is a great stepping stone to whatever comes next. I’m learning so much, and I learn more every day. As a writer, I’m still involved in research and finding out new things. As a community manager, I get to do my favorite thing ever – help people. Is it so absolutely bizarre that I actually love responding to customer feedback and writing FAQs? Being involved in QA, I’m learning a lot about testing a site for bugs. In general as a marketing assistant and such, I’m learning a bit about product management and general marketing for a web startup. I think all of this puts me in a great spot to move on to bigger and better things later in life, whether that be a position with more responsibility at my current company or something else. A while back I applied to a community manager position at another startup and it came down to me and someone else. I didn’t get the gig, probably because my journalism experience wouldn’t directly cross over to interacting with site users on a daily basis. But now… my resume can potentially land me another community management job, if I ever need to look for another one down the line.