Tax Tips for Freelancers

It’s time time of the year again, when our thoughts turn to… taxes! Tax time can be particularly stressful for freelancers, because we have more records to keep and irregular income. This guest post is from freelance bookkeeper Lorretta Walker. Please note these tax tips apply only to freelancers in the United States.

Freelancers have tax issues that can be complicated. But if you keep proper documentation all year round and keep up with tax law via irs.gov, or on IRS Twitter feed, you will be well ahead of the game.

Freelancers’ Tax Issues

Below are some issues for the self-employed  for the 2010 tax filing season, which begins January 14.

1. Health insurance deductible for the self-employed

As part of the Small Business Jobs Act of 2010, self-employed individuals may deduct the cost of health insurance premiums paid for the taxpayer and his/her immediate family as an expense when computing Self-Employment Taxes (Schedule SE of federal return). If you are covered under a spouse’s employer-sponsored health insurance plan, you cannot deduct health insurance costs.

2. Change in cell phone reporting

Cell phones used for business are no longer considered “listed property.” This means that employers may deduct cost of providing cell phones to employees for business use without having to keep records of personal use vs. business use.

3. Making Work Pay credit

Part of the ARRA (stimulus package) passed in 2009, this was not renewed in the last minute tax breaks extended in December. It allows a dollar for dollar reduction of your taxes equal to 6.2 percent of your wages up to a maximum credit of $400 for single filers, $800 for married filing joint filers. This is calculated on Schedule M.

4. Increased start-up expense deduction available for 2010

The Small Business Jobs Act has doubled the first year start-up write-off from $5000 to $10,000. This expense should be claimed as “Other Expense” on Schedule C. For every dollar your start-up costs exceed $60,000, you must reduce your first year write off of $10,000 every year until it reaches zero, done on Form 4562, Depreciation and Amortization.

5. Another year of bonus depreciation

The Small Business Jobs Act allows for an extension of the fifty percent bonus depreciation originally begun in 2008, retroactive to Jan. 1, 2010. The bonus depreciation is in addition to regular depreciation. Eligible property includes passenger automobile used at least 50 percent for business, off-the-shelf (retail) computer software, and qualified leasehold property.

Record Keeping for Freelancers

You are in business to make a profit. Keeping track of your income and expenses, whether by hand or on a computer, will help you with financial statements, differentiate between personal and business expenses, and prepare your income taxes such that your tax liability is as minimal as possible.

These are some  business expenses reported on Schedule C:

A. rent for property used for business

B. interest on business debt

C. taxes imposed during ordinary course of business, such as excise taxes, franchise taxes, employment taxes paid to employees, real estate taxes for business property

D. deductible insurance premiums for liability insurance, malpractice insurance, workers comp, insurance that covers loss for business equipment, credit insurance for bad business debt

E. business travel, meal and entertainment subject to certain limitations

F. cart/truck expenses, either actual or mileage for the calendar year

G. credit card convenience fees

H. advertising

I. education (e.g., continuing education required to maintain your professional license)

J. internet related, such as domain registration costs and webmaster related costs

K. legal and professional expenses–e.g., fees paid to attorneys, accountants in course of maintaining your business

L. penalties and fines incurred by business owner for work not performed

For a total listing and description of business expenses that are deductible on Schedule C, go to irs.gov and read publication 535, Business Expenses.

Got Tax Questions?

I hope the above information has helped you in your tax planning for the year ahead. If you have any questions, post them in the comments below, and I’ll do my best to respond right away.

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Lorretta Walker is a New York-based bookkeeper, who’s been managing her successful business since 2002. Follow Lorretta on Twitter and check out her freelancing site at LLWE Business Services Plus.

Top photo credit: dizznbonn