My biggest advice to you, oh new to the world of contracting/freelancing:
Hire an accountant
Seriously. Having a competent accountant has save my bacon, and my husband’s bacon, and both our collective bacon, more than once over the years. Here is what my accountant does for us:
Figure our taxes (duh!), which can be pretty complicated. Our record year so far was three W-2’s and NINE 1099’s in one year. Plus all the expensive/deductions/depreciation. It’s not always that crazy (last year I had 1 W-2 and only 2 of the 1099’s) but when it is professional help will save you much time and agony.
Tells me how to keep records to satisfy the IRS as well as my own needs
Helps me set up my quarterly tax payment schedule.
A good tax adviser will also be able to help you with your questions about equipment, shared or not, and deduction of part of your living space, use of your vehicles, and any recent changes in the law. And the laws do seem to change every single year.
As a tax rep who helps people (often contractors) in horrific tax situations not lose their… everything, I would like to reiterate this wise statement.
Quite legitimately, the vast majority of our clients are people like you- folks who have made a sudden switch from W2 to 1099 and just royally fuck themselves by messing up their taxes.
First, how much can you deduct? I get this question all the time and it usually comes with a wink wink nudge nudge sort of look. My response? “As much as you actually spent, sir.” “Oh, but Diosa,” they say, “come on! How much can I really take?” “As much as you actually spent, sir.” If it’s a legitimate business expense and you legitimately have receipts and a log, you can deduct it. I suppose you might get audited and asked why you needed the $3000 Mac instead of the $700 Dell, but if you can justify that, then deduct it.
If I’m remember my last tax conference correctly, tax returns with schedule Cs get audited more than a regular return. Why? The IRS knows you’re more likely to fudge the numbers. So, I’d be 100% straight and make sure I don’t deduct a thing that I don’t have a receipt and log for. If you have someone legit prepare the return and give you advice all year, they have to help you if the return gets audited.
You also need to make those estimated payments you mention on a quarterly basis. Is it hard? No. A good CPA should tell you exactly how much to send in. The number 1 mistake our clients make (prior to hiring us, I mean) is that they figure they can wait until the end of the year to pay their tax on their 1099 income. Except, April comes and you don’t have $25,000 laying around. Then the same thing happens the next year. Then you need to hire us. And I mean, you’re nice and I’d like to have a business relationship with you, but we should probably try to avoid that :p.
My advice? Get a good accountant. Actually, I’d get an Enrolled Agent- they tend to be a little better. If you PM me where you’re at, I might be able to suggest someone to you.
Also: depending on how much you plan to make (we usually rule of thumb it at about $50k a year), it might be beneficial for you to incorporate. You save self employment tax that way- about 15%.
Health insurance premiums are completely deductible if you’re self-employed. I’m not sure where you got this information, but I’m pretty sure it’s old.
You can also get an HSA that will make it so that up to about $6K (for a married couple) worth of health-related expenses not counting insurance premiums are also deductible. It’s actually a pretty good deal for self-employed people, because the money you put in can be rolled over from one year to another.
I actually just met an EA today, via posting a similar Hail Mary post for advice on a local Technology listserv. Can I ask what the discernible difference is between a CPA and an EA?
EAs are more specialized- they often have more training, plus the EA exam is considered harder than most CPA exams. Also, the EA can represent you before the IRS if there ever is a problem. Some info on EAs.