How to do taxes right as a freelancer—important pitfalls to avoid
Freelance creative work and tax prep tend not to mix well. Whether you’re a photographer or a party clown, the freedom of working for yourself comes with the burden of juggling multiple 1099s and W2s (perhaps easier for clowns), hoarding receipts, and calculating what percentage of the bed you use as a desk counts as office space—all accompanied by the lingering anxiety that you’re doing it wrong.
“Everybody thinks everybody else has a grasp on taxes, and they’re the weird one,” said Rus Garofalo, founder of Brass Taxes, an online tax prep service for freelance creatives. “There’s a universal feeling that you should understand this, and there’s something wrong with you for not knowing how it works.”
With April 15 around the corner, he spoke to BethKobliner.com about what unconventional workers can do to stop overthinking (or underthinking) their taxes. Here are five takeaways.
Realize what counts as work
Your work doesn’t have to be profitable to be considered on your tax return.
“I was writing and performing, and video editing was my money job,” Garofalo said of his freelance past. “And I was only dealing with the video editing for my taxes because that’s how I was making money. But I was spending thousands of dollars working on writing and performing.”
Not feeling legitimate, Garofalo believes, is a major factor in how people weigh what does and doesn’t count as work.
He didn’t tell the IRS about his side hustles, “The same way I wasn’t going to tell people at a party I was a comedian, or a writer, because it was like, ‘On what show?’ and it’d be like, ‘Um, well, nothing yet!’”
Uncle Sam isn’t as judge-y.
“The IRS actually has a really benevolent form of interpreting what you’re doing,” Garofalo said. “They care about your intention. What’s your goal? Are you being reasonable about pursuing that goal? As soon as you do make a profit, you’re going to pay tax. You might as well take the benefits while you’re gaining the skills along the way to that potential payday.”
Be realistic about tracking your expenses
Maximizing your expense deductions can save you a lot of money—if you can keep track. This is where Garofalo has seen many clients hold themselves to an impossible standard, only to burn out and fall behind.
“We tend to worry way too much, and then we just stop thinking about it because we can’t worry that much,” Garofalo said. “Find a reasonable, workable system, and take perfection off the table.”
That might mean using a tracking app or accounting software like QuickBooks, updating a DIY spreadsheet, or simply sorting your paper receipts at the end of every week. The most important thing? “Track your expenses during the year,” Garofalo said. “Don’t think you’re going to do it all once at the end.”
Consult a professional if you need to
As for what actually counts as a deductible expense, your mileage may vary—but a tax professional can help.
“Some people are too conservative, because they think they’re going to get audited, and the police are going to come and take them away,” Garofalo said. “Other people are like, ‘Everything I do is work. Everything’s a work expense.’
“The IRS says that you can take necessary and reasonable business expenses,” he continued. “But say I’m a performance artist. I shoot ketchup and mustard all over myself on stage. Once you think of all the jobs possible, what’s necessary and reasonable becomes really amorphous.”
What’s business and what’s personal may meld in the life of an artist. But ultimately, “There has to be a line,” Garofalo said. A tax preparer can help you define yours—and save you money, whether by showing you deductions you didn’t know you were allowed or by steering you away from mistakes that will make you owe more later on.
Know (roughly) how much you’re going to owe
Guessing what you owe the IRS every year is Freelancing 101, but it’s also one the trickiest parts of being your own boss, especially if you’re primarily paid as an independent contractor. And with the whole nation undergoing a tax transition, it’s tougher than ever.
Even if your income remained stable last year, when you do your taxes this year, you’re apt to be in for some surprises (more about that below). You can glean a sense of what you might owe based on federal and state (and sometimes local) income tax rates, as well as self-employment tax. But it’s best not to assume that the number you get from an online calculator is going to be accurate.
And that’s why, whether you opt to pay estimated quarterly taxes or front the whole amount at once, it’s worth it to have a system for setting aside a percentage of your earnings. (Overestimating never hurts, in this case.) The key? “Understand that’s not your money,” Garofalo said.
Buckle up for a weird couple of years
Like all American workers, freelancers have encountered surprises this tax season because of the 2017 GOP overhaul. Garofalo says many of his clients have found themselves with smaller refunds—the result of the adjustment to payroll withholding in federal income tax. The law pumped a little more money into each paycheck, but at the cost of the annual tax windfall millions of people rely on.
As of this tax year, salaried employees can no longer write off work expenses, which Garofalo said has proved problematic for a large segment his clients. He works with “a lot of W2 employees with high expenses, like writers and actors,” who generally have to pay commissions to agents, managers, and lawyers out of their income, in addition to incurring other expenses, like travel. Over the past year, Garofalo has advised some of them to incorporate, which, while it comes with some additional setup costs, will allow them to continue writing off as they have in the past.
“I describe doing taxes as a video game you play once a year,” Garofalo said. “You’re going to be terrible at it. Not because it’s super hard, but because you only play once a year.”