Paying Taxes as a Freelancer or Contractor with Bridget Todd and Ben Sargent

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On this episode of Financially Naked: Stories from The Financial Gym, our host is Bridget Todd, Head of Trainer Development and employee #1, and she is joined by her client, Ben Sargent. He is a CPA and owner of Sargent CPAs.

Podcast Notes

  • People who are self-employed are more aware of paying taxes than someone who gets a W-2. People who get W-2s tend to do well with Turbo Tax or boxed software, because there isn’t much to their taxes.

  • When you are self-employed, you need to pay your own taxes. You need to be aware of how much you will owe and set money aside. It is important to be aware of the tax deductions and credits you can take. 

  • In 2020, there were a number of stimulus programs, and unemployment, that interact with freelance income. There are paid leave tax credits related to COVID relief provisions. This includes freelancers who were not able to work due to having COVID or who were caring for someone who had COVID. It also includes freelancers with small children who couldn’t work because school was closed. 

  • There were some changes around the Earned Income Credit (EIC), and the IRS is allowing freelancers to use their 2019 income to qualify, instead of 2020 income. 

  • The deduction for an employee-based home office went away in the Tax Cuts and Jobs Act in 2018, so there isn’t any benefit for people who work at home for their employer. Many companies are reimbursing employees or letting them keep their same salary while they work in a different state with a lower cost of living.

  • For self-employed, there are deductions around home offices that are based off the square footage of their home. It needs to be a carved out/dedicated area and your primary work location used exclusively for your business. 

  • Deductions for internet, cell phone, and other equipment would be based on a percentage of use. The IRS says you can deduct things that are ordinary and necessary for your line of work, which covers a wide variety of things. If you spent the money trying to make more money, it is probably a deduction. 

  • The IRS has specific rules around clothing deductions. Clothing must be for business purpose and not suitable for every day use, which includes costumes and uniforms.

  • Meals are generally 50% deductible, but for 2021 and 2022 it is 100%. If you are cooking specifically for a blog post, the cost of the food is probably deductible. 

  • Establishing a separate credit card and bank account for your business makes filing your taxes easier. If you don’t have separate accounts, the best thing to do is to go through your bank and credit card statements, highlight, and add the business expenses to a spreadsheet.

  • Save for taxes and pay them quarterly. Most people are paying what they expect to owe or paying what they owed last year through their employer’s payroll. Freelancers need to do this themselves. The penalty for not paying taxes quarterly is about 5%. If you are setting aside money in your savings account, you are better off paying it quarterly to avoid interest.

  • The Married tax table assumes there is one high earner in the family and this is why most people owe when they choose it on their W-4 form. Oftentimes, it is better for the lower earning spouse to set their withholding to Single and the higher earning spouse to set their withholding to Married.

  • Many times bonuses are under withheld, because they increase your annual earnings to a higher tax bracket. If your bonus is taxed at 22% and your tax bracket is 35%, you will owe at the end of the year.

  • Taxes are a sign that your business is doing well. Do things that minimize the amount you need to pay. 

  • Tax software does most of the heavy lifting. If you are a W-2 employee, a CPA won’t add any magic to the process. When you have freelance income, rental properties, investments, etc., and you need guidance, it may be time to talk to a CPA. The value of working with a professional is not them filling out forms, it is about communicating well.

  • If you are a freelancer, set aside 30% for taxes, set up a separate bank account and credit card, and have more conversations with your friends about finances.

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