Freelancing question

Does anybody here freelance? I’m considering freelancing for a while as an alternative to regular full-time work, and was curious to know about tax consequences.

I am assuming that you have to file special forms and maintain copies of all paystubs, but is that all? You just check a different box on your state & federal tax returns, and include additional forms, or do you have to incorporate?

The tax consequences can be complicated, though not onerous. There are a few advantages to freelancing, as well as drawbacks.

Usually, you need to fill out a schedule C. That’s where you indicate all your freelancing income, as well as any expenses. Once nice thing about a schedule C is that you can take legitimate expenses off the top. I don’t have enough deductions to itemize on my tax return, but I’m able to deduct quite a few expenses on my Schedule C. As long as you can legitimately show they are part of doing business, they’re a legal write off. For instance, your office supplies, travel expenses, etc. can all be written off.

If you make more than $400 after you’ve taken your deductions, though, you need to fill out a Schedule SE for self-employment tax (i.e., Social Security). It’s twice what you usually pay for SS :frowning: but you get to write half of it off on your Form 1040 (line 30). There are also some other deductions on the 1040 adjustments to income.

In addition, if you’re making enough to live on, you need to fill out an estimated tax (1040 ES) form to pay your equivalent of withholding. You need to pay this in advance or be hit with penalties. It’s a simple form – you estimate your income, then pay a quarter of that amount every three months.

All these schedules (except the 1040ES) are in your basic 1040 tax packet and all the information is built into the forms. I don’t know about your state tax, but in NY, the tax form merely has you copy the information from the Federal form; you need to also include a copy of your Federal Schedule C with your state return.

You don’t need to incorporate unless you are making a large amount of money – the incorporation taxes and fees put it out of reach of most freelancers, anyways.

It helps if you have an accountant, but you can do it yourself; most tax prep software will guide you through the process.

Freelancer here.

I concur with what RealityChuck has said, with one minor difference – I have occasionally been hit with a slight penalty for underpayment of estimates because my quarterly payment didn’t quite meet the minimum for what I made that quarter. The quarters are not equally spaced (payments are due on (or near) the 15th of April, June, September, and January) and your income may fluctuate as well, so you have to keep close tabs. If I understand correctly, you are OK as long as you pay in at least 90% of what you paid last year. I am a number freak and tight on cash, though, so I have my tax preparer figure my estimates each quarter and pay in a bit more than she recommends. The payments come from a savings account into which I dump 30% from each check I receive. This more than covers my estimates (which usually run around 20%) with extra left over for house insurance, property tax, sales tax for my second business (a relative pittance) and other regular lump expenses.

Once you’ve filed your first 1040-ES, the IRS will send you a set of pre-printed vouchers and envelopes for you to send in with your payments.

Thank you both so much for the information! I’ve been considering freelancing for a while, but wasn’t sure if it was worth it. Do you find you make enough to live on comfortably? How did you find your first project? Was it extremely difficult? Do you have any advice?

Sorry for all the questions - while freelancing is something I’ve been considering for some time, I’ve found a lot of confusing information on the Web, much of it that sounds like it either doesn’t apply or is just plain bullshit (i.e., there are thousands and thousands of freelancing positions just waiting to fall into my lap - yeah, right). I plan on going to the library and finding out more, but it’s nice to get direction from some people with experience.

I’ve been a freelancer for about 6 years now, and I love it. There are definitely waves of feast or famine, so make sure you’re the kind of person who can save during the good times and enjoy yourself/relax during the slow times.

As for how much work there is, I have no idea how to answer that. Depends on your line of work, how much there is to go around where you live, how much competition you have. I’m a television editor and I live in Hollywood – we’re (luckily) in constant demand. But if I tried selling snow tires here, I doubt I’d be able to pay my bills.

The one thing I recommend is to get an accountant. Forget about doing it yourself – I tried for years with home tax software, and didn’t realize how many mistakes I made till I got an accountant who did things soooooo differently. And you MAY want to consider incorporating, though it’s not always necessary. Bit of a pain, but helps protect you from audits and liabilities.

I’ve heard that you should not consider incorporating unless you have a steady six-figure income - the costs and paperwork make it not worth it.

Freelancing is extremely difficult. It proves the value of the adage “who you know is more important than what you know.” You must know people who will hire you. Networking is crucial. And the current economy has been crushing to freelancers in many fields.

One bit of advice. Freelancers tend not to be organized. You must become so if you are not already. For tax purposes, if for nothing else, save everything, every scrap of paper that comes in or goes out. Write down every expense. Record mileage, travel costs, gas, tolls, meals, tips. Keep credit card receipts. Make sure you have a paper trail for every business dollar that goes out and every business dollar that goes in. Document all computer, office, and supply purchases. Find an accountant that knows what is expensable and what is depreciable and what is deductible. Worry about things like health insurance and where to find it without a full-time employer. Ditto for mortgages and loans of all kinds.

Freelancing is as much a business as running a store. You must learn to think like a business. Yeah, this isn’t the fun part, but it’s the part that nobody tells you about and you usually learn about too late.

It makes sense that freelancing has a lot to do with contacts. Fortunately, a friend of mine used to be a freelancer as well, and put me in touch with a couple of people at local freelancing agencies he used to use. Not that that guarantees me a job, but it definitely helps. Also, an aquaintance of mine has asked if I would be interested in doing a Web site for her business. It’s not a lot, but it’s a start. I’m also planning on going to local business happy hours so I can meet people who might need my services.

I’m expecting this first year or three to be difficult. In fact, I don’t know if I will fail or succeed. But it’s worth it to me to try. I fortunately have some savings put by, so I won’t be destitute while I’m searching. Of course, those savings will only last so long…

Why did you guys start freelancing?

I do some freelance writing, but not as my main source or income. A few years ago, however, I freelanced for about seven months before getting a regular job. I liked the freedom, and always seemed to get enough work to keep going, but didn’t like beating the bushes for work; I definitely prefer a steady job.

The flexibility of freelancing really appeals to me as well. Also, I just can’t handle office politics. I mean, I’m really bad at it, and I don’t understand it. Most office politics that I have dealt with are completely illogical, and I’ve tried so hard to keep out of it or just deal with it, but when you’re working at writing copy in a marketing department, you’re going to run into politics whether you like it or not. I’m sure you run into some of the same issues as a freelancer, but it seems like you’d have a lot more distance. Do I have it wrong?

Verbose – you still haven’t told us exactly what you do, so it’s hard giving freelance advice. Seriously, the market and job you do have a lot to do with it.

I went freelance because freelance editors make more money, have more freedom, and get to work on a larger variety of shows than staff editors. Plus the vast majority of tv shows are cut by freelance editors, it’s pretty much the norm, not the exception.

Then again, when I was out with the flu for a few days last month, I didn’t get paid at all for the downtime… there ARE negatives.

I sought out freelance copyediting/proofreading work because I was a Square Peg in the working world – I liked my work (litho stripper at a printing company) but hated the job politics, co-workers, etc. I’d done some reading about copyediting and felt that I was tailor-made for it. After studying up, I sent off about 40 letters to potential clients froma trade directoty; this netted me a few editing tests (standard procedure for evaluating virgin editors) and my first client, God bless them. After six months, I felt confident enough to quit the hated job and replace it with a more fun part-time job while building my client base and workload, and six months after that I went completely solo.

For the next several years I gradually added clients. Mr. S had a “real job” and he carried our insurance and paid most of the bills; my lump-sum fees paid my personal bills and “chunk” expenses like lumber for the house, property taxes, and vacations.

In February 2001 Mr. S got downsized. Ooops. Goodbye 2/3 of our income. Suddenly I had to be the breadwinner. We managed to cut our expenses, and I kicked myself into high gear and increased my income. We still need for Mr. S to bring in some money, and while he’s still looking for a “real job,” he has helped fill in the gaps with temp work and such. But for the most part I pay all of the bills. That feels pretty good. I am blessed with five or six regular clients who keep me well supplied with work; I regularly turn down projects because I’m already booked. In this economy I feel EXTREMELY lucky to have as much work as I want.

For me the beauties of freelancing are many: the autonomy, the ability to drop PITA clients, the ability to determine my own income by the rates I accept/set and the speed at which I work, the flexible schedule, the pride of being my own boss, having puppydogs under my desk to lick my toes while I work, working in comfy sweats and an environment that I control, the variety of projects. There are downsides: no paid sick days/time off, higher costs for insurance/taxes/etc., no IT department to save me when the computer goes tits up, difficulty of planning vacations around workflow.

In my mind the pros far outweigh the cons. I can’t imagine ever being conventionally employed again.

I’m an electronic marketing copywriter and editor with some experience in newspaper editing. That’s basically a fancy way of saying that I write (or will until Friday) promotional e-mail copy and Web content showcasing various services, firm achievements and news items. I also write and edit press releases and story pitches for the local business journal. I had hoped to have the opportunity to work in print publications. My dream would be to edit books. But with my lack of experience in editing or writing a significant amount of copy for print publications, and because I’m just moving into this, I realize that it will be a long while if ever before I get to do that. A teeny tiny bit of newspaper editorial work, plus Web content writing/editing, won’t get me too far if I’m more interested in books.

For a little background, I recently turned in my resignation because I was absolutely miserable there and knew that I had enough savings to hold me over for a while until I found a job and/or made a final decision on whether or not I want to strike out on my own. I’ve been thinking about this so long and putting money away so that I would have the luxury I currently have, which is time to consider my options and make an informed decision. So I guess that I’ll have plenty of time to keep researching. As I said, my official last day is Friday, but the powers that be decided that my last day in-house would be a week ago Friday. Enough of our senior partners are already questioning the marketing department, and with my departure a lot of questions were raised about the effectiveness of our department’s management. I began getting a lot of calls from higher-ups asking why I was “really” leaving. I’m just proud that I managed not to bad-mouth anybody before leaving. At least I get a decent testimonial about my writing abilities, provided my marketing manager is still there in a couple of months. If she’s not, I’m glad I got references from the senior partners. :smiley: