Somehow, April 15 manages to happen every year. Along with death, the one thing we can be certain of is taxes. And one thing a freelancing singer can count on is that taxes will be complicated beasts, only increasing in their idiosyncrasies as more work is taken on.
Because 1099s—and heaven help you if you also rake in W2s or anything beyond that—are fickle beasts, opting to do the plug-and-chug of an online service like H&R Block is often the surest way for a freelancer to end up paying far more than is necessary to the IRS. As an experiment, I fed my 2009 numbers through TurboTax’s free program. In a year that my accountant’s magic mathematical mind had me cutting a check to the government for just under $200, Turbo would have had me forking over almost 10 times that amount.
Erring on the side of caution is one thing, but there’s a very well defined line between breaking the law and breaking the bank (hint: using a computer algorithm over an actual, college-educated accountant will fall into the latter camp). Which is why we asked several tax professionals what their soundest advice for freelance clients would be in this month’s $50 Week. Whether you owed or were owed this year, consider this a residual bonus.
Game Plan
“Creative types are notoriously bad bookkeepers and create headaches for themselves at tax time because they have no idea how much money they brought in or paid out,” says CPA Wray Rives. “As a freelancer, you are also a business owner and need to keep a set of books and records to know how your business is doing.”
The most successful—and thrifty—taxes come from individuals who put in a requisite amount of time and effort into their bookkeeping. You may have not balanced your checkbook in a few years thanks to online record keeping, and with a few swift clicks in the right places, you can make your receipt culling just as pain free. “There are several free or low-cost options now for tracking your income and spending,” adds Rives, “so I really don’t see any reason a freelancer should not have their finances computerized.”
Likewise, planning over the year for Uncle Sam may not save you any money off your final payment, but it’ll leave you in shape to cut that check. Evelyn Bandoh, the founder of EAB Creative Planning Services (a firm that helps creative professionals build successful business enterprises), suggests an allocation system to be applied to each payment you receive.
Take a look at your personal finances and figure out how to make each check pay for the people who helped you (coaches, teachers, etc.), pay yourself (now’s a good time to think about setting up a separate checking account just for your business), save for taxes, plan for the future or retirement, and cover health insurance if you don’t already have it. “The numbers will be based on certain factors,” says Bandoh. “But this approach is helpful for saving and creating conscious financial accountability.”
Tools of the Trade
“Services like FreshBooks.com and Outright.com are your friends. Use them right, use them consistently, and they will help you keep track of your financial transactions,” says Bandoh.
FreshBooks helps to send invoices, track time, and organize expenses and has a handy iPhone app. You can try it for free for 30 days, no credit card required, and there is a free account option, though monthly plans run as low as $19.95. Outright offers a similar take on spending tracking and is totally free, even offering a printable Schedule C for filing convenience. The benefit to sinking in 20 minutes a week with these sites is that at the end of the year your profit-and-loss statements are already complete, which means the end of scrambling to find all of your fiscal year receipts come January 1.
“The biggest mistake is not keeping track of personal and business finances,” Bandoh adds. “This results in a ripple effect of late tax filings, cash flow issues, back taxes, penalties, and unnecessary stress and financial fear.”
If you aren’t already on Mint.com, a veritable e-checkbook, it’s also a worthy addition to your tool belt. The highlight of this system is that it categorizes your purchases for you. It takes some teaching at first, but it does that part of your taxes for you, freeing up time to find an accountant if need be. Because the most important takeaway from freelancer taxes is . . .
Don’t Do It Yourself
I’ve written this in another recent edition of the $50 Week, but it bears repeating: Do. Not. Do. Your. Taxes. Yourself. The remaining advice in this article should be taken with a grain of salt—I’m not a lawyer, nor is anyone mentioned in this article—but I can say with full certainty that doing your own taxes as a freelancer is, like a countertenor
trying to take on Wotan, just a bad, bad, bad, bad move. Maximize your social networks, your union contacts, or an advocacy group like Fractured Atlas to find a bargain on an accountant who knows how to handle your financial situation. The best part is you can write off their full fee the following year.
Location, Location, Location
If you moved to Germany last year and still haven’t returned to the country, or if you’ve been based in London for the last half decade, listen up: for those of you U.S. citizens who are living abroad, you are—according to CPA and owner of OnlineTaxMan.com Vincenzo Villamena—excluded from paying tax on $92,900 of your income in 2011, provided that you have been living outside of the country for 330 days. That’s a whole lot of savings.
However, if you have a foreign bank account that totaled over $10,000 at any point this last year, that has to be reported to the IRS. “There are no tax implications necessarily,” explains Villamena. “But given the recent crackdown on Swiss bank accounts, you must report this or you can receive up to a $100,000 fine and five years in jail.” That’s not a whole lot of savings.
Know What You Can Deduct before You Buy
You may know your list of deductibles like the back of your hand, but if not, here are some highlights. Anything related to career development (your lesson and accompanist fees), dry cleaning if it’s within reason, your phone and utility bills as they pertain to business use, a portion of your rent if you maintain a home office or studio, and all charitable or suggested donations—New Yorkers, get a receipt next time you spend a dollar to go to the Metropolitan Museum.
But it gets more interesting. Villamena points out that “[Y]ou might as well stay in a nice hotel, because the entire cost is tax deductible. Likewise, the cost of travel—air, rail, or auto—is 100 percent deductible, as are costs associated with life on the road.” However, you can deduct only 50 percent of your meals on the road. “So stay at the Ritz and eat at Wendy’s,” Villamena adds. You may still go more modest than the Ritz, but keep this in mind next time you travel—it could be a good incentive to build up loyalty points with one comfortable hotel chain rather than relying on the cheapest hostels and motels.
Don’t Fear the IRS
Regardless of what your final outcome is, the IRS is a civil service—emphasis on the service. Sure, they take your hard-earned money, but that’s what keeps your city running. It sucks. But it’s worth it.
It’s even better lately. As The Awl’s Choire Sicha notes in an article last April, worth reading for information on what happens when you don’t do your taxes, “There’s a lot of TV- and movie-propagated terror about the IRS. . . . And the truth is . . . well, they kind of used to be a little mean? But that’s actually ancient history. . . . IRS employees are like most civil servants; they deal with confused, freaked-out, and sometimes very dingbatty people (not you, friend!) every day—the kind of people who do not follow directions, particularly. So if you are not a jerk, they will be delighted to speak to you, at length.”
Incidentally, you should file your taxes. File for an extension if you need it and that will buy you another six months to get your act together. Amend it if you made a mistake. You can work out a payment plan with the IRS if what you owe outnumbers everything in your bank accounts. But file your taxes. If you don’t file, the IRS will do it for you, and they won’t be as sly or creative (and still legal!) as an accountant. If you’re due for a refund, you’re just shooting yourself in the foot—the government will take that back after three years. And if you owe the government, those penalties and late fees multiply like rabbits.
