Any tax saving tips for freelance work?

[bank5]

I have a full time W2 job and I also do some 1099 freelance work on the side. The freelance work is taxed 40-45% (my tax rate, plus the self-employment tax, plus State taxes).

Are there any recommendations for reducing these taxes? I write off as many business expenses as I can but I don't have that many. My freelance work adds up to about $15k a year so it doesn't seem like it would be worth incorporating.

[jimnjana]

travel expenses associated with the work add up fast, the standard mile rate is pretty generous this year. Also, look to make sure you are including all costs associated with the free lance work, postage, office supplies, are commonly overlooked. Also if you are working out of your home consider home office. Taxes that high make me wonder if the free lance work is worth it.

Jim

[Grep]

I've done quite a bit of consulting (i.e. 1099). You are right that the taxation is terrible. In my case I'm lucky to keep even 50% of the income.

My rules of freelance work are (1) to dare to charge way more than you think your client will pay, (2) to turn down work that, even then, is not both easy and lucrative, and (3) to "fire" any clients that don't respect you, your time, or who fail to pay promptly.

Rule 1 will actually help gain the respect of your client. "You get what you pay for" will work in your favor. Rules 2 and 3 are a matter of self-respect for your own time, given that you have a full time job. You have to avoid thinking only about the money. That can be nice, but free-lance work can and will kill your free time and your relationships unless you are able to say no.

Next, Section 179 is a boon to the self-employed. You can write off virtually any business related purchases 100%, immediately in the year you bought it (there is a cap, but it's rather high). This means that if you need a new desk, chair, table lamp, etc., or a new computer, etc., it costs you only about half of what you pay (after the tax deduction). Use this aggressively!

I'd be much more conservative about the home office deduction, however, since traditionally the IRS has always viewed that as a potential red flag.

Finally, you should definitely open an SEP (Simplified Employee Pension) account. It's a super-charged IRA for the self employed. It's very, very easy to open and to manage, and it's not too late to open one for last year. You can look into the 401k option as well, but it's a little more complicated and it may cost more to manage. There are pros and cons to each.

[bank5]

Quote:

Originally Posted by Grep I've done quite a bit of consulting (i.e. 1099). You are right that the taxation is terrible. In my case I'm lucky to keep even 50% of the income. My rules of freelance work are (1) to dare to charge way more than you think your client will pay, (2) to turn down work that, even then, is not both easy and lucrative, and (3) to "fire" any clients that don't respect you, your time, or who fail to pay promptly. Rule 1 will actually help gain the respect of your client. "You get what you pay for" will work in your favor. Rules 2 and 3 are a matter of self-respect for your own time, given that you have a full time job. You have to avoid thinking only about the money. That can be nice, but free-lance work can and will kill your free time and your relationships unless you are able to say no. Next, Section 179 is a boon to the self-employed. You can write off virtually any business related purchases 100%, immediately in the year you bought it (there is a cap, but it's rather high). This means that if you need a new desk, chair, table lamp, etc., or a new computer, etc., it costs you only about half of what you pay (after the tax deduction). Use this aggressively! I'd be much more conservative about the home office deduction, however, since traditionally the IRS has always viewed that as a potential red flag. Finally, you should definitely open an SEP (Simplified Employee Pension) account. It's a super-charged IRA for the self employed. It's very, very easy to open and to manage, and it's not too late to open one for last year. You can look into the 401k option as well, but it's a little more complicated and it may cost more to manage. There are pros and cons to each.

Great points Grep. I charge about twice as much for my freelance work compared to what I make per hour from my W2 job. I'm about to increase my rates about 10% too.

The SEP account could be key. Even though I run my business as a sole-proprietor I can still open up a SEP account?

[bank5]

I just found this article and I think the Solo 401(k) is the way to go - SEP vs. Solo 401(k) - Kiplinger.com

Granted I won't be able to contribute for 2008 but I'm ok with that.

I think I'm going to with Vanguard - https://personal.vanguard.com/us/acc...iewContent.jsp and toss in every freelance penny I make (assuming it's less than $16,500 this year).

I'm curious though, are distributions from a Solo 401(k) taxed more than a Traditional 401(k) account? Seems like the IRS wouldn't want to miss out on that 15.3% self-employment tax.

[LOL!]

Quote:

Originally Posted by bank5 ... and toss in every freelance penny I make (assuming it's less than $16,500 this year). I'm curious though, are distributions from a Solo 401(k) taxed more than a Traditional 401(k) account? Seems like the IRS wouldn't want to miss out on that 15.3% self-employment tax.

Don't worry, when you learn about taxes, you will find out that you pay the SS taxes on your income including anything you put into a SEP, 401(k) or traditional 401(k) up to the SS contribution limit. Since you probably hit the limit with your W2 wages, your self-employment SS taxes will be limited to the "employer" part of those taxes.

And once again, you can contribute $16,500 combined as an employee to all your retirement plans. So if you contribute $16,500 at work you will not be able to contribute anything as an employee to your SEP or solo401(k). However, there is an employer conribution (even though as a self-employed person that means you are the employer) in the form of profit sharing that you can make. This amount is limited to 25% of that self-employed income.

Self-Employed 401k - The Retirement Plan for Business Owners and Entrepreneurs (search for "keep their day job" in this link).

Maybe some combination of Roth 401(k) at work and SEP or solo401(k) for the free-lance work would help in the long run, but I haven't run the numbers.

[Grep]

Quote:

Originally Posted by bank5 The SEP account could be key. Even though I run my business as a sole-proprietor I can still open up a SEP account?

Yes, absolutely, I have an SEP as a sole proprietor. It can be used regardless of whether you contribute to a normal IRA, etc. It's as easy as going to your bank (or Vanguard, etc.) and saying "please open an SEP for me." A 5-10 minute form and a deposit and you are done. Just do it before April 15 (or before your extension runs out) and you can open one for 2008.

You can convert an SEP to a solo 401k later. I have a 401k plus a 403b at work, both of which I max out. I'm rather unsure about the rules regarding a solo 401k and whether the one at work would interfere with it.

[samclem]

Home office: Your mileage may vary, but for most LBYM types (with a smaller home to start with minor upkeep expenses) and it's often a fairly small deduction. The IRS is said to question this deduction frequently.

I don't know if this appeals to you, but you could put every penny of your freelance pay into a tax-deferred solo 401K retirement plan and pay zero tax on it this year. You'd have to pay tax when you withdraw the money, but you might be in a lower bracket by then. A SEP IRA is a good vehicle, but you can't put as much away. More info at this link.

For 2009, in a solo 401K you can put the entire first $16,500 you earn into the account, and then 25% of your net earnings (approx). Limits and conditions apply, etc, etc.

[LOL!]

Quote:

Originally Posted by samclem For 2009, in a solo 401K you can put the entire first $16,500 you earn into the account, and then 25% of your net earnings (approx). Limits and conditions apply, etc, etc.

That's probably not true. One is only allowed $16,500 from ALL plans, so I imagine if one is in the 45% marginal income tax bracket that they have already contributed $16,500 from their W2 job earnings. OTOH, one can contribute that 25% from the "employer" of the free-lance work. With $15K available, that could shelter $3,500 which ain't small. If one only made $2K, then it probably wouldn't be worth sheltering $500.

And you can always give it all away to charity.

Oh, I should say that I do a few thousand of "free-lance" work as well. My clients pay 100% of my travel and meal expenses, so no need for me to deduct those since the reimbursements do not appear on the 1099. I don't need or use a home office because all I do is show up on site and give advice. I used to buy books and journals related to my free-lance work and charge that as an expense, but I don't buy any books anymore. The main trick I use is to pick my clients based on their location: Paris, London, Beijing, Melbourne, New York so that I can tack on some vacation time. Can you say "Great Wall"?

[samclem]

Quote:

Originally Posted by LOL! That's probably not true. One is only allowed $16,500 from ALL plans, so I imagine if one is in the 45% marginal income tax bracket that they have already contributed $16,500 from their W2 job earnings.

Yes, good point. Of course, if bank5 would just get rid of that pesky full-time W-2 job, this wouldn't be an issue.

[target2019]

These tips are based on 25 years of self-employment.
1. Record all mileage and auto expenses.
2. Take clients and potential clients out for meals.
3. Invest in technology that keeps you on the leading edge (section 179).
4. SEP or Solo 401 with Vanguard.
5. Seminars that directly apply to your business model.
6. Set aside one room to conduct business. Keep all your business assets there.
7. Raise your rates to find the best clients.
8. Take a tax course. Do your own taxes.
9. Make quarterly tax payments.
10. Work on the highest rungs of the ladder.

[bank5]

Quote:

Originally Posted by target2019 These tips are based on 25 years of self-employment. 1. Record all mileage and auto expenses. 2. Take clients and potential clients out for meals. 3. Invest in technology that keeps you on the leading edge (section 179). 4. SEP or Solo 401 with Vanguard. 5. Seminars that directly apply to your business model. 6. Set aside one room to conduct business. Keep all your business assets there. 7. Raise your rates to find the best clients. 8. Take a tax course. Do your own taxes. 9. Make quarterly tax payments. 10. Work on the highest rungs of the ladder.

Thanks for the tips. Do you have any recommendations for a tax course? I usually use TurboTax for my taxes but obviously have a lot of tax questions.

[target2019]

Quote:

Originally Posted by bank5 Thanks for the tips. Do you have any recommendations for a tax course? I usually use TurboTax for my taxes but obviously have a lot of tax questions.

I took H&R Block tax course in 2005. It cost about $200 at that time. The class time was over 40 hours, which was a lot for an 8 week class. The instructor was very good. I worked in a tax business part-time in 2006.
You can search local community college, etc. and may be able to come up with an equivalent course.
I took this course because all of my experience was in Schedule C, and I needed to understand the 1040 better. The H&R entry course covers the 1040, but not much time spent on Schedule C. They have advanced course(s) to cover that (more money, of course).

[eridanus]

The 25% is for a corporation. A sole proprietor can only contribute 20% of self-employed income.

[Rich_in_Tampa]

If you happen to be paying your own health insurance premiums and are not eligible for employer-supported health insurance at your day job, you can deduct the premiums as an expense to your sole proprietor or LLC job, I believe.

[LOL!]

Money is money. It doesn't matter whether it comes from your right pocket or your left pocket. Whether you contribute $16,500 from your day job or your free-lance work just does not matter except in the case of employer match. Note that you could contribute $16,500 from your day job and still be able to contribute some of your free-lance income to a solo-401(k).

[bank5]

Quote:

Originally Posted by LOL! Money is money. It doesn't matter whether it comes from your right pocket or your left pocket. Whether you contribute $16,500 from your day job or your free-lance work just does not matter except in the case of employer match. Note that you could contribute $16,500 from your day job and still be able to contribute some of your free-lance income to a solo-401(k).

One big difference is that I have more control over the Solo 401(k). I would rather manage my own plan than be tied to my employers. If I go with my employer 401(k) I have to use Fidelity and only have a limited # of funds. If I go with a solo 401(k) I can choose which company (planning on Vanguard) and I have more control over the account. You can also contribute more to a solo 401(k).

[Poundkey]

I do my son's taxes and I have a question about free-lance income and taxes. My son is employed full time. He's trying his hand at free-lance photography on the side. Last year he took pictures for a company (not the company he works for) and received a 1099-Misc. for the $1,000 he billed them. My question is, since the amount was inserted in box 7, which I assume tells IRS he is self-employed, am I asking for trouble if I deduct expenses such as the camera, tripod, mileage, and computer he used? My thoughts are to depreciate the camera and computer and take full deduction on the tripod.
Any advice will be greatly appreciated.

[ziggy29]

Quote:

Originally Posted by Poundkey Last year he took pictures for a company (not the company he works for) and received a 1099-Misc. for the $1,000 he billed them. My question is, since the amount was inserted in box 7, which I assume tells IRS he is self-employed, am I asking for trouble if I deduct expenses such as the camera, tripod, mileage, and computer he used? My thoughts are to depreciate the camera and computer and take full deduction on the tripod.

Provided the camera and the computer are ONLY used in that side business (i.e. not also for personal uses), that sounds like it would be reasonable. Keep in mind that the IRS doesn't like to see a "business" that usually loses money -- if you lose money as a sole proprietorship on Schedule C three times in a five year period, you're likely to be reclassified as a "hobby" and lose the deductions. (Seeing a loss in the first year because of capex and other startup costs isn't at all unusual, though.)

[LOL!]

As a photographer and someone who gets a W2 and also has Schedule C income, I would say that if your son uses his equipment outside of his free-lancing, then it is not deductible. I would find it is very difficult to have 2 computers: one for work and one for games, fun, hobbies, reading this forum.

OTOH, the IRS would never know unless an audit occured. And for such low income would probably never trigger an audit.

If son bought some photography books, then they could be 100% expensed on Schedule C (where the income goes) including a book on how free-lance photographers should do their taxes.

But in the end what you decide to deduct really depends on how aggressive you want to be. If the return is audited and the taxes changed, that is actually a very small consequence.