Thanks to everyone who joined us yesterday for a live Q&A with Jonathan Medows, CPA. He has a resource section with how-to articles specifically for the self-employed at his website, www.cpaforfreelancers.com. We had hundreds of questions, and Jonathan didn't have time to answer them all, but we hope that you find what you're looking for here.

For those who couldn't participate, we hope these answers provide some help to you this tax season!

The Basics

*Moderator: *
From Meredith Kaunitz on Facebook: Is the threshold for getting a 1099 from an organization the same in every state? Is it $600/ year or $900/year?

*Comment From Terry *
Worked on a project for 3 weeks in 2013, but was not paid until Februardy of 2014. Where do I report the income -- 2013 or 2014 ?

*Jonathan Medows: *

Excellent question. You take it in the year paid so in your case 2014.

*Jonathan Medows: *

It's $600 but even if you do not get a 1099-Misc or if the income is below the filing requirement you should self-report all earned income on Schedule C.

*Comment From Liz *
I recently graduated college, so my income was low in school. If you made under $10,000 for the year, does that mean you don't have to file?

*Jonathan Medows: *

Liz, you should file a return because 1) you are above the filing requirement 2) if you were self-employed you may have a self-employment tax obligation and 3) you may actually get money back via the earned income credit.

*Comment From Cathy *
How can I maximize my refund? The Guy from H&R block said even with all my receipts, my refund will be based on the amount declared in 1099 which is much lower the my expenses.

Jonathan Medows:

Hi Cathy,

Assuming you are not eligible for refundable credits the most you can get back is what you paid in for estimated taxes or had withheld from your paycheck during the year.

*Comment From Kasey *
How do the tax rules and regulations apply when you file jointly with your spouse who is not a freelancer (i.e. they get a regular W-2)?

*Jonathan Medows: *

Essentially, the only difference will be from a "normal" non-freelancer return is that you will have a Schedule C to reflect your business revenues and expenses. Otherwise, you report your income the same way. I hope this helps you.

Definitions and Entities

*Comment From Fred *
If you're a freelancer are you automatically a sole proprietorship? If not, what's the difference?

*Jonathan Medows: *
same things- just different terms

*Comment From Fred *
I'm new to the freelancer world. When is it beneficial to become an LLC vs self employed? I know nothing....

*Jonathan Medows: *

Hi Fred,

Good question. There is not one right answer to this and sometimes state and local taxes come in to play when I give my clients advice on this. I would consult with a CPA or EA on this issue.

Unemployment

*Comment From LB *
Hi Jonathan - I am currently unemployed (and collect NYS unemployment when not receiving freelance income). However, I earned a considerable amount of freelance income in 2013. Am I likely to qualify for relief from the IRS because I am unemployed (either through a monthly payment plan or amnesty for some of the tax I will owe)?

Jonathan Medows:

Unemployment insurance is taxable (it stinks - I agree) and your liability will be based on your adjusted gross income.

Deductions

*Comment From Maddie *
Can I deduct gas instead of mileage?

*Jonathan Medows: *

Yes, you can take actual costs as opposed to standard mileage.

*Comment From Jamie *

I use the same laptop for business and personal things. Can I deduct cost of repair?

*Jonathan Medows: *

You should take a %. If you use the laptop for 30% work you should only claim 30% of the repair as an expense.

*Comment From Lisa *
Can you deduct mileage for driving to the field if you volunteer as baseball coach for your son's team? Also, for driving son to his volunteer camp job?

*Jonathan Medows: *

You can. Keep a log of miles.

*Comment From Guest *
I'm a freelance writer/editor (sole proprietor) who particpates in and co-hosts a number of business-related events. Can I deduct the cost of supplies (mostly food and some wine, plus related items like compostable plates, etc.) as "supplies" or are these expenses "meals and entertainment"? Thank you.

*Jonathan Medows: *

Assuming these are business development expenses. You can break up the actual food and booze to meals and the rest take at 100% as supplies or some other appropriate category.

*Comment From Jamie *

I know I can write off my health insurance as a business expense, but do things like prescription copays and office visit copays count as well?

*Jonathan Medows: *

Not for the self-employed health insurance deduction. The medical expenses you mentioned should go on Schedule A in the medical expense section.

Comment From Gideon
I am told zipcar expenses are not deductible. is this true?

*Jonathan Medows: *

If you rented the car for business it's legitimate. For personal use it's not.

*Comment From Jon *
Like most NY apartments we don't have a lot of room for a dedicated office. Still, we do a great deal of work from home. We own the house so we're already deducting the interest etc. Is it even worth deducting a bit more to cover the 'office' part of the house, or is this a red flag we should avoid? Thanks.

*Jonathan Medows: *

Hi Jon,

I also live in a shoebox in Manhattan and totally get it. Without the dedicated space you are precluded from the deduction.

If it's only 5 sq feet you are talking about it may not be that financially beneficial to write off.

*Comment From Rayan *

Jonathan, each of my 1099-MISCs that I have received from my clients include the expenses I incurred and were reimbursed by them for. What do I do? Contact them, or can I easily just make deductions on Schedule C?

*Jonathan Medows: *

Hi Rayan,

Good question. You should report the expenses you billed to the companies as your own expenses as well if the 1099-Misc reflects this as additional income. This will fix the issue you are having.

*Comment From Guest *
25% of my business comes from a client, employees of which I would like to take out to lunch. Can I write off my plane flight, hotel, and lunch tab? Could I combine this with a vacation? I legitimately think this simple act would get me more business. I have no other similar deductions (I only write off my computer). Thank you!

*Jonathan Medows: *

Hi guest,

Wish I worked with you. The lunch is deductible especially if it helps you to develop more work. The travel, if you are going specifically for this meeting and it leads to more work could also be argued as a deduction. However, you can't write off your vacation. At best, you can only deduct the portion of your travel expenses that corresponds to the portion of your business travel. I.e., if one day of the trip is business of a 5 day trip you can take 20% of your expenses. Don't be abusive and use common sense with this in case you have to explain yourself later on.

*Comment From Julie *
What are some common mistakes freelancers make on deductions - either things you try to deduct but shouldn't, or should deduct but frequently miss? Thanks!

*Jonathan Medows: *

Inappropriate deductions such as clothing that is not a uniform, costume or safety equipment or aggressively writing off their lifestyles arguing it's business (such as going to the movies and calling it research).

Freelancers tend to miss mundane things such as supplies and local transportation.

Comment From Mike
We bought our house this year and I am deducting a home office. Can I deduct reno supplies like paint, etc to prep the area to make it my office?

Jonathan Medows:

Congrats and make sure you get blue tape before you paint.

Yes you can- they are a direct expenses as it is for the home office space (as oppose to taking a % like other home office deductions).

*Comment From Anjali *
I rent now, but i like the idea of building a residence plus office (I'm an architect) as my business grows. Any red flags in terms of claiming a portion of construction costs?

*Jonathan Medows: *

You would probably have to depreciate this over a few years rather than taking the expense right away.

*Comment From Glenn *
With business meals, I've always read that you can only take 50%. Same with MI&E. However, a friend who is incorporated says his acccountant takes 100%. Which is correct?

*Jonathan Medows: *

Hi Glenn,

It depends on the situation. There are certain instances when you can take 100% (for example you have employees and have a communal kitchen and provide snacks) but most meal type of expenses are deducted at 50%. There are special rules for truck drivers as well.

*Comment From MM *
I used to be able to deduct my medical expenses that went over 7.5%, but now starting this year expenses have to be over 10% and of course my medical expenses are over 7.5% but below 10%. Is there any relief for those of us who dont file a Schedule C but are a freelancer without benefits who gets a W-2 at the end of the year. Thank you.

Jonathan Medows:

The only special thing about freelancers is that we can write off our health care premiums as an adjustment against gross income instead of Schedule A. This is more advantageous for us.

Social Security

*Comment From Rebecca *
Since freelancers can reduce business income through deductions…is there a level we should aim for in order to maximize Social Security benefits later in life?

*Jonathan Medows: *

Hi Rebecca, I was actually consulting a client on this very issue earlier today. While your deductions reduce your taxable income which lowers your tax bill it also reduces your income used for SS calculations later on.

Working Outside the State Questions

Eve Eschenbacher@MidnightRem
@freelancersu @katielane How do you file income from foreign companies as a freelancer? They don't give you a 1099? #freelancetax

*Jonathan Medows: *
Great question. They won't usually issue you a 1099-Misc. You should self report your income on schedule C. Don't forget to claim ordinary and necessary business expenses.

*Comment From Luis *
I'm based out of NY but did a short 2-week freelance job out of California for which I received 1099 income. Do I need to file a California return or can I include that income in my NY state return?

*Jonathan Medows: *
Hi Luis. You should report the income earned in California as well as the income in NY. Since you are a NYS resident your entire income will be subject to NYS tax (and NYC if you are in the City) but you get a credit for taxes paid to another state so you avoid double taxation. Best of luck.

Retirement

*Moderator: *
From Scott Beddome on Facebook: Along with a SEP can you also do a Roth in the same year?

*Jonathan Medows: *

Great question. The rules are really complex on this. I would consult with an accredited financial advisor who knows the ins or outs, but off hand there are income limitations on Roth IRA contributions, especially when you have other retirement plans. Software these days is also good advising you if something is not allowed. I am assuming you are using TurboTax. Put both in as an experiment and see if you get a diagnostic.

*Comment From PB *
Hi Jonathan - what is the fundamental difference between investing in a SEP, versus a Traditional, IRA to offset my AGI before April 15? I'm an independent contractor, not an LLC owner. Thoughts?

*Jonathan Medows: *

Another good question. You guys are really sharp.

The SEP is really designed for freelancers and other self-employed persons to make up for not having a 401k or other retirement scheme at work. The IRA contribution limitation in 2013 (which you can fund until 4/15/14) is $5,500. The SEP IRA allows you to put more money away. It's a function based on your freelance profit and it can be a max of $51,000. Consult with a financial advisor as there are many options available for freelancers.

Late Payment and Tax Trouble

*Comment From David *
In 2012, I didn't have enough set aside for federal taxes and have entered into a repayment plan with the IRS. This year, I'm in the same situation, but I don't think I'm allowed to have another payment plan with the IRS, am I? Obviously fixing my core issue of being more responsible with taxes is an important thing I need to do, but how do I deal with this current situation this year?

*Jonathan Medows: *

David,

Sorry to hear about this. This is common with freelancers. We always are in a cash flow crisis.

You're best off getting help from a tax professional who has experience with the IRS on these issues as this can be tricky.

Start Up Costs

*Comment From Julia *
Is it a red flag if your expenses exceed your income, and if so is there a threshold that attracts attention? Starting up a new venture and have many expenses without corresponding income for now until it gets off the ground.

*Jonathan Medows: *

Hi Julia,

Congrats on the new endeavor. You should google start up expense rules as there are restrictions in deductions when you are in start up mode. Happy reading.

*Comment From Sarah *
I am new to freelancing and I already have quite a few receipts from a recent business trip and some start-up costs. Any advice for storing and maintaining expense records so I don't run into trouble down the road? I plan to meet with an accountant soon but until then I want to make sure I'm properly tracking these expenses. Thank you!

Jonathan Medows:
Keep everything! I represent people who are audited and this is the biggest issue we face - the inability of the taxpayer to substantiate his or her deductions. Get a scanner to scan things if you don't have room. Good luck freelancing.

Self-Reporting Income

*Comment From Liz *
I'm a contract designer for a company, however I didn't get issued a 1099. They didn't realize that they didn't have one on file until past the deadline. What should I expect when I file?

*Jonathan Medows: *

Self-report the income on Schedule C. This should not hold you back.

Quarterly Taxes and Budgeting

*Comment From LB *

2013 was my first year of "self-employment"/freelancing. What would be some of your recommendations for either putting away $$$ for year-end taxes or paying IRS quarterly? How do I even go about doing that? Sending them a check? This confuses me. Thanks, you're the best!

*Jonathan Medows: *

Hi Patrick,

I recommend clients to set up a separate account for holding their estimated taxes. You should remit quarterly (4/15, 6/15, 9/15 and 1/15). You can send in payment vouchers or set up online accounts with the IRS and your state and local tax authorities.

*Comment From Maddie *

Just transitioned from full time with taxes withheld to on-call consulting for this year (2014) where I will be paid hourly. How much of my gross should I set aside for estimated taxes?

*Jonathan Medows: *

I advise clients, depending on whether they live in a high or low tax state, to set aside anywhere from 28% - 33%. This is a rough number but enough to prevent any damage from occuring.

*Comment From ItsKnowOne *
Suggestions on keeping everything organized. Are there alternatives to keeping receipts for everything, a good site or specific banking companies that work well for freelancers.

*Jonathan Medows: *
I've seen commercials for a personal scanner that will categorize expenses. I think it's called smartscan. This may be helpful. There are a bunch of online apps as well that you may want to check out.

FICA Tax

*Comment From Marissa *
When did the 2% Fica Tax get repealed? My accountant did not account for that in my estimations and now I owe a lot this year. Should he have known that that was repealed for 2013's estimations?

*Jonathan Medows: *

You mean the reduction in the FICA. To the best of my knowledge at the beginning of 2013.

Local Taxes

*Comment From RB *
As a NYC-based freelancer, living in Manhattan, what is the REAL % of gross most freelancers end up paying in taxes, taking into account that darn city tax?

*Jonathan Medows: *

Great question - yes, 2 in particular. NYC Unincorporated business taxes and NYS MCTMT.

Other Tax Resources:

Unfortunately, time restricted Jonathan's ability to answer 100% of the questions. Luckily, he's already answered most of them in these great resources. If you have additional questions, put them in comments, and I (not Jonathan) will do my best to direct you to other resources. Thanks!

Tax Deductions - A step-by-step guide

How to Read Your 1099

Get a Fresh Start on Your Taxes -- For freelancers who can't pay taxes on time

Taxes for Freelancers Living Abroad

Six Critical Questions to Ask Yourself About Taxes

How to Set Up Your Business and Pay Taxes