Tax Prep for Freelancers with Jonathan Medows
Abbey Woodcock: So, can everybody hear me and see me? Okay, perfect, awesome. Alright, cool, and I will introduce our guest here. This is Jonathan Medows. He is the CPA for freelancers.com. He’s out of New York City, and he’s gonna help us a little bit today with some basic tax prep for freelancers. A lot of the questions, I saw the same questions coming up over and over in email, and I wanted to bring somebody on. I can answer some of these questions just by working with freelancers, but who better to do it than somebody who specializes in doing accounting for freelancers, so it’s 1:00, if we’re good to get started we’ll go from there.
Abbey Woodcock: So, welcome Jonathan, and thank you so much for joining us. I appreciate it.
Jonathan Medows: My pleasure. Good afternoon, everyone.
Abbey Woodcock: Alright, so we will dig right in like I said. As I said, as more people are coming in, if you have questions, please put them in the Q&A section and then any other comments or anything you can put in the chat, but I won’t be monitoring the chat quite as closely because I’ll be paying close attention to what we’re learning here. Awesome, Tracy, Heather, Jenn, awesome, guys.
Abbey Woodcock: Alright, so let’s just dig right into the questions. So, Jonathan, I told you a couple of the questions that we got over email, and I’d love to hear kind of an overview of, at this point in the year, we’re coming up to the end of the year, what should freelancers have put together or gathered to prepare for filing their taxes this year?
Jonathan Medows: So, by this point, towards the end of the year, I think most of us should have a sense of where our profit number’s gonna wind up. By profit, I mean revenue less business expenses. So what that means is we should be having our financials more or less in order, whether it’s everyday, I do mine everyday, or once a week, or once a month. Someone should have a sense of their numbers. So that means they should have some sort of accounting system in place, organizing their revenues, organizing their expenses, running their profit number, and they should be thinking of A, estimated taxes, as we approach the fourth quarter deadline of January 15, and the year-end, possibly, for some individuals, for state and local.
Jonathan Medows: They should be considering possibly some business taxes they may need to pay in addition to personal income taxes, such as, if you’re in New York City or other locations that charge a business tax such as Philadelphia. And, finally, what they should be asking is, is there anything I should be doing, whether accelerating revenue or expenses or slowing down revenue or expenses to mitigate the financial impact vis-a-vis what they anticipate coming in next year.
Jonathan Medows: So, for example, for myself, I have a bit of a lag on certain collections, so I personally slow down my charitable deductions. Still gonna give them, but I decided to make them in January, because I foresee next year we will have little bit more income just because of timing and collections.
Jonathan Medows: So that’s an example of year-end planning that people should be entertaining.
Abbey Woodcock: Perfect. So, you mentioned expenses, so what kind of expenses or deductions do you see freelancers missing, or what are some things that we can be looking at to kind of decrease what the profit is that we’re gonna be taxed on here?
Jonathan Medows: So, must of my freelancers miss the gray expenses, things that are maybe not fully 100% deductible for business purposes, such as a cell phone, that there may be an element of a personal business use. Home office deduction. Again, things that are not perhaps coming specifically out of a business bank account, but they’re business-oriented. Mileage on their cars. Those type of expenditures.
Abbey Woodcock: Awesome, perfect, so are there any things changed in the last year or so? Are there any new tax laws that are particularly relevant to freelancers or that we should be paying attention to?
Jonathan Medows: Yeah, so there, mostly for the benefit under tax reform, certain incomes, if they’re received a certain way, won’t be subject to income tax. Specifically, there’s a flow-through deduction for members of LLCs, S-Corps, and people that are self-employed, where if their income is below $150,750 if single, double that if married, they can exempt from their self-employed income or LLC or S-Corp 20% of that income from taxes. So that’s a magnificent benefit for us.
Jonathan Medows: Downside is, on tax reform … And also, for people that are spending big bucks, like, I have a physician of mine, he’s renovating his office. He’s able to accelerate certain bigger purchases and write them off in full now, as opposed to in previous years where you’d have to expense them over multiple years.
Jonathan Medows: Downside, is the entertainment deduction went bye-bye. Meals are still there, but entertainment specifically has gone. For example, if you go to Yankee Stadium, it used to be, with your client, you would be able to write off both the tickets and then any food eaten there. Now you can just do the food.
Abbey Woodcock: Okay, so that’s relevant if we’re taking a client out to dinner.
Jonathan Medows: That’s relevant [inaudible 00:17:15] client entertainment industry, it became an issue because of the laws right now.
Abbey Woodcock: Okay, makes sense, perfect. Awesome. And so when we’re looking at expenses and deductions and that kind of thing, what kind of paperwork or receipts or anything like that should we be saving? How should we be saving it and for how long should we be saving it?
Jonathan Medows: Right, so let me back up. So, number one, under the Internal Revenue Code, you have to maintain books and records of some sort showing your revenue and expenses. Reason I mention this is because all this information is important to the state and local tax authority, if they audit you, in one way or another. So you should keep your record of revenue and expenses. It can be a spreadsheet, doesn’t have to be, per se, QuickBooks or some other software, although that’s helpful. You need to keep receipts to support your expenses, original or scanned copy. Bank statements by themselves are insufficient. It comes up a lot in audits. I’m dealing with this now in an audit of ours, that has this as an issue.
Jonathan Medows: Save it for a minimum of three years.
Abbey Woodcock: Perfect.
Jonathan Medows: From when the tax return is filed.
Abbey Woodcock: Okay. And so what’s the number one mistake you see freelancers making that come into your office at tax time?
Jonathan Medows: They come to me at tax time. That’s a major mistake. They should be coming in at the beginning of the year and doing some planning to see what we can do to mitigate their bill by the end of the year. After the fact, we’re just an expense search. Beginning of the year, we can structure you potentially to minimize taxes.
Abbey Woodcock: Okay, perfect, so, let’s talk about that a little bit. So, what are some things that freelancers can start to think about now that, when it comes January, thinking about their 2019 tax bill, what are some things they can start to think about to prepare? Maybe they got a big bill in 2018 that they aren’t fond of. What can they do to start to think about how to mitigate that or things that they can do now to be better off at the end of next year?
Jonathan Medows: Number one, entertain the possibility of forming an entity, whether C-Corp, S-Corp, LLC. Number two, look into retirement savings. Number three, spending cycles. When you should be spending, when you shouldn’t be spending. A better handle on your financials and setting up your entity potentially can save you hundreds, if not thousands, of dollars.
Abbey Woodcock: Perfect, awesome, so if we want to think about an entity, or wanna think about tax planning, how do we go about finding a good accountant or tax preparer? I know it’s something that some of our community has struggled with, finding somebody that understands freelancers, what we do, how our taxes might be different than somebody that owns a brick-and-mortar business, for example.
Jonathan Medows: Sure, so I’d say the following. Again, I think a mistake a lot of people do is they come to someone in March and April. A good person’s gonna be tied up then. Like what you guys do, you’re a freelancer and you’re a creative type, and you’re coming right when you have traditional deadlines, you’re not gonna be available. You have to seek out someone earlier on. First of all, you have to make sure that the person knows what they’re talking about. Because they can be the nicest person in the world, but if he or she doesn’t know this niche and how to play in it, they’re not gonna be good.
Jonathan Medows: So what I would do is have a conversation, always start, “hey should I start an entity,” and see the person’s reasoning. You may agree with it, you may disagree, but see their reasoning. Second thing is, do they pick up the phone? For some clients, it’s really important. For other clients, it isn’t. And number three, do they have the time to handle you? Are you comfortable taking an extension? A good accountant may need that because he’s popular, and some clients aren’t comfortable with that. So you have to find out your temperament.
Jonathan Medows: Number four, also, are you the type that are comfortable delegating? Some of us are uptight, let’s be honest, that’s why we work for ourselves. We’re perfectionists. If we weren’t, we couldn’t do what we do. But if you’re hiring somebody to do the work, you’ve gotta lot he or she do the work and have the time to do it.
Abbey Woodcock: Awesome, perfect, yeah, that’s super, super helpful. Let me see what … We have a few questions in here. Let me see. Okay, so we got a question for Tracy, and just so, I just wanna put context at this question and some of the stuff that I’ve talked to you on in case somebody sees this recording in the future. Today is December 14, 2018, which means that we’re coming right at the end of the year and thinking about 2018 taxes, what we need to do to prepare them, and then, 2019, finances, what we can do to set ourselves up for the end of the year.
Abbey Woodcock: So, Tracy says, “Is it too late for me to set up an LLC and get the tax benefits this year?” I’m assuming she means this year as in 2018. “I’m currently just operating as a sole proprietor.”
Jonathan Medows: Probably … It depends. You need to speak with someone. The LLC per se won’t save you any money. It’s kind of a loaded question. Off the top of my head, probably not, it’s probably something for ’19 planning at this point.
Abbey Woodcock: Okay.
Jonathan Medows: I saw something pop up, if I may address it.
Abbey Woodcock: Yeah.
Jonathan Medows: Somebody said that they were, I’m sorry, guys, multiple screens, someone popped up and I saw a question, “I heard some chatter that the flow-through deduction,” essentially, anyone can get it, as long as their income is below $158,000 and $315,000 It starts to phase out after that. Beyond that point, people where the reputation of the business is subject, is a business, CPAs, lawyers, dentists, creative professionals can’t get it. There are other caveats where you can get a deduction based upon W2s. But for people like us in creative professions and professionals in it, in that row, where the reputation is the primary business, the flow-through deduction is available to us, but after $157,000 and change and $315,000 and change, if married, it starts to phase out. When you hit $415,000 and married, it’s completely phased out.
Jonathan Medows: So it is available to us, but there are certain caveats based upon salary.
Abbey Woodcock: Perfect, yeah, and I’m just gonna repeat the question just so the recording people see it. It says, “I heard there’s a consultant caveat that could keep some of us from taking the pass-through deduction. Should copywriters worry about that?”
Jonathan Medows: It’s based upon your income. If you’re below $157,000 fine, then double that to $315,000, married, you’re eligible for, after that, it starts to phase out. $415,000 if married, and, give me a second, guys, $207,500 if single, you’re no longer eligible for it.
Abbey Woodcock: Perfect. This question is from anonymous. “I have all my records of costs. The problem is, I have a lot of deductions for the business but very little profit. Aside from wanting to earn more, will this be a problem at tax time?
Jonathan Medows: Assuming the deductions are appropriate, no. That doesn’t guarantee you won’t be audited, but if someone asks a question and you can prove it, you’re fine.
Abbey Woodcock: Perfect.
Jonathan Medows: You’ve gotta be able to prove it in case somebody asks a questions. The issues that I see for a lot of freelancers, where there’s excess travel, and meals, and auto deductions, that’s usually what I see where people are being audited lately. They have heavy meals and travel expenses. More likely than not, somebody’s gonna ask a question.
Abbey Woodcock: Okay, perfect. Alright, so Rebecca says, “Going back to, what did you mean about looking into retirement savings? Can you speak more about that?”
Jonathan Medows: When you work for yourself, you can avail yourselves of making of 401(k) contributions, SEP-IRA contributions, there are a myriad of retirement plans that are available to people that are self-employed. IRAs, Roth IRAs, Roth 401(k)s, certain plans, moneys go in tax-deferred, meaning they reduce your taxable income now, and when you retire, that income does become taxable. Certain of the Roth plans, you don’t get a tax deduction now, but when you retire, that money is tax-free.
Abbey Woodcock: Perfect, awesome. Kimberly says, “If I’m a sole proprietor and I hire others like a virtual assistant, is that an expense I can deduct?”
Jonathan Medows: Yeah, but make sure … So this is an issue that I deal with constantly, people think they’re hiring people that are independent contractors, and then they get audited by state for unemployment insurance or worker’s comp and then these people get reclassified as employees. Various states have various rules about who’s considered independent contractor and employee. Virtual assistant is an issue. It’s an issue when you’re hiring people and you’re supervising them, or they’re coming onto your site. They may not be independent contractors, even if you think they are.
Abbey Woodcock: Okay, perfect. And so is it varied by state, or does it go by how many hours they work, or how much money-
Jonathan Medows: Nothing to do with hours. It’s a matter of control of their action. You have someone that comes onto your site, and you list them as an independent contractor, and they’re doing admin work for you. They’re gonna be reclassified as an employee.
Abbey Woodcock: Okay.
Jonathan Medows: For instance, someone like me, if I send someone from my office, no, [inaudible 00:26:29], so it depends. It really depends. Where this comes up is you have a terminating event and someone files for unemployment insurance, and that’s what usually triggers these audits.
Abbey Woodcock: Okay, perfect. Let’s see, Carmella says, “I’m just starting out. I had a business in the past.” It looks like both an S-Corp and a C-Corp, so maybe two different businesses. “I’m considering for this business a sole proprietor. Is that a terrible idea?”
Jonathan Medows: Not necessarily, but I’d consult with someone, because tax … If you’re not gonna make any money initially, it doesn’t matter. If you’re gonna make money, it may not be the smartest idea. It depends upon where you live. Consult with someone. Find a good accountant and consult with him or her.
Abbey Woodcock: Perfect.
Jonathan Medows: The issue is, and I constantly use the refrain, especially in my practice, a lot of these issues of structuring tend to come down to state and local tax considerations. I’m in New York City. There are business taxes. So even though an S-Corporation can be perfectly fine to someone who’s in upstate New York, because of the New York City business tax considerations, I may not give that person that advice to set up an S-Corporation in New York City. So find someone that is well-versed in the state and local taxes of your state and your locality, and speak with him or her, and get some help. It’s not one size fits all. Try to Google it, and you can make a bad decision.
Abbey Woodcock: Perfect, yeah, I think that that’s a point that’s worth repeating, is, with any of this kind of accounting stuff, that’s what people ask me all the time. Those kinds of questions, and the answer is always, “Find a good accountant that understands your kind of situation, because there’s so many different variable to consider, and you want somebody that can consider them in your specific situation. Even though we’re all doing the same type of work, we’re all different places.
Jonathan Medows: It depends really on where you’re sitting doing the work because the advice that I’ll give you in Florida is gonna be advice I’m gonna give you … Difference in New York City.
Abbey Woodcock: Right.
Jonathan Medows: State and local taxes really take a strong consideration into this. So, even if you have a CPA who’s well-versed in New York City, he or she may not be the best for California, for example. There are other issues out there.
Abbey Woodcock: Perfect. This comes up a lot when we discuss sales tax, too. People ask if we have to charge sales tax, and the answer is, it basically depends where you are and the type of work you’re doing. So where I am, I don’t have to, in copy … In the work that I’m doing, I don’t have to charge my clients sales tax.
Jonathan Medows: Not in New York state, but unless you give them a deliverable, you may need to charge sales tax.
Abbey Woodcock: Right, exactly. But I think it’s Arizona or New Mexico, one of the southwest states, that services also have sales taxes.
Jonathan Medows: Very, very dependent. I have a side company, I have a software company. We write software for other accounting firms. It’s called TaxWorkFlow. Workflow software for other accounting firms. It’s boring, but it’s something. We had to register, at one point, our servers in New Jersey, because even though I didn’t have an office out here, I had physical equipment that we were maintaining. We were maintaining servers. I had to register for sales tax there.
Jonathan Medows: Very specific, depending on the state and local rules.
Abbey Woodcock: Perfect. Makes a lot of sense. So, Rebecca says, “When we think about preparing for 2019, you said, number one, entertain the possibility of creating an entity, number two, look into retirement savings, and, three, spending. I missed what you meant by the last one.” So, I guess, thinking about spending … I think you were talking about spending cycles.
Jonathan Medows: Right, accelerating expenses, slowing them down. It depends upon your individual circumstances. So, for example, in my situation, I have a situation where we have a little bit of a delay on some significant monies that we haven’t gotten yet. They’re gonna come in, hopefully, in January. I’m slowing down my spending because I wanted to match my collection cycle, because that would be more of a tax benefit for me. Some people want a spend-down now, because they had a great year. Some people will have a better year next year, it happens, sometimes. So that’s what I mean by spending. You’ve gotta match your cycle to where you are.
Abbey Woodcock: Perfect. And, just a personal example, our accountant recommended that we, end of the year for us, that we increase our spending, because we had a really good year, we have really high profits, so that’s another example of, “Hey, is there anything that you can buy for your business here for the end of the year to …
Jonathan Medows: Yeah, computers are usually a good answer for me, people just … Technology’s always something that you want to augment. Computers, that’s my standard answer, by the way, so if you wanna go for anything, go for that.
Abbey Woodcock: There we go. My husband always likes that answer. He loves going into the Apple Store.
Jonathan Medows: Yep, no wait, no. Bottom line, I have a cell phone. I write off the whole thing. I’m like, okay, great, I get a benefit. I use it all the time for work. If I don’t want to work, I don’t take it with me anymore. So there’s a reason why they allow these write offs, and you’re not putting one over, you’re using it to make money.
Abbey Woodcock: Yep, exactly, perfect. Let’s see. Lawrence says, “You mentioned keeping receipts and records for up to three years. I have heard that it may not be applicable for expenses below $25. Is that true?”
Jonathan Medows: I would strongly urge you to keep everything, because what happens is, if you’re in an audit, and you don’t have receipts for anything, they’re going to terrorize it. I represent a lot of people in audits. The more paperwork you have, in case someone asks a question, the better off you are.
Abbey Woodcock: Perfect. Let’s see. “I’m totally lost. Can you slow down a tiny bit? This 415 thing. I’m super-fast typist and I’m taking …” So, Rebecca, I’ll answer this one. Number one, the recording and the transcript is going to be available. The 415 thing I think you’re referring to is the phasing out of the pass-through deduction at $415,000 for married couples, so if, between the two of you, you’re making $415,000, your pass-through deduction is going to phase out. So, if that’s not applicable to you, we don’t really need to dive into it. If it is, we’re happy to, but you will get the recording and the transcript of this call, so don’t worry about missing anything.
Abbey Woodcock: Let’s see, okay, “Can you speak more about automobile-related deductions? I use TurboTax and they ask about writing off part of the vehicle maintenance. I think I could write off new tires, but they ask extra questions about mileage, so I always skip that part.”
Jonathan Medows: So, to the extent that you use a car for business use, it’s deductible as a business expense. So, some people take standard mileage, where you get a deduction of X% per mile. Other people will use the actual costs of the vehicle and the maintenance, inclusive of these tire repairs, and then, software companies or doing it themselves will take a percentage that. So if you use a car 60% for business use and use spend $100 on tires, then $60 becomes a deduction.
Abbey Woodcock: Perfect.
Jonathan Medows: Also, the insurance, you may wanna take the time to do that, unless you just wanna use the standard mileage.
Abbey Woodcock: Perfect. I don’t know who that was from. That was anonymous, so, if you have any further questions, just go ahead and post that in there. Let’s see. “I have several international clients without an IRS number.” I’m assuming you mean like a social security or an EIN number. “Is there a special way to classify this, or just ‘other income’?”
Jonathan Medows: They’re paying you or you’re paying them?
Abbey Woodcock: Kimberly, if you could answer that in the chat. Are you paying, or you mean, your clients the ones that are paying you? Yep, paying her.
Jonathan Medows: Nothing. You have to report the revenue.
Abbey Woodcock: Perfect.
Jonathan Medows: Whether they need to file with the IRS is their concern. Your concern is about reporting your income.
Abbey Woodcock: Perfect. Okay, so “How do we determine whether a potential accountant really knows and understands our kind of online business? I’m basically looking at Yelp at accountants with good reviews, but I don’t know how to vet them.”
Jonathan Medows: Call up a couple people and ask them some questions you don’t know to handle. Or, either, you don’t feel comfortable handling.
Abbey Woodcock: Perfect.
Jonathan Medows: Ask them, maybe, for some references.
Abbey Woodcock: Yep.
Jonathan Medows: I mean, Yelp’s a double animal. We all work for ourselves, so you know what happens with Yelp. Anything bad? Right away, they go and run and post it. Anything good, they suppress. The only people that go to Yelp tend to be the people that are mad, so Yelp’s a double-edged sword, I find, at least. Speak to the person. See if they’re human. Ask them how they handle people. Ask them maybe for a couple clients. Ask your friends for recommendations also, if you have any that work with other professionals.
Abbey Woodcock: Yeah, that’s what I would recommend, too, if you’ve got other freelancers that are in your area that are using accountant, who they’re using. The other thing that I just wanna add to that is, like, a lot of times I get some questions from people in the community about accounting and about legal concerns, is the other area where I get a lot of questions where they Google around. That stuff is worth spending the time on finding a professional that can help you, and a professional that’s gonna be kind of a partner in your business and help you.
Abbey Woodcock: A great accountant can make you money. And to think about who that person is that you wanna work with and taking the time, instead of just kind of whipping through it, this is stuff that’s gonna set your business up for growth in the long-term and really take a huge concern off of you, both the accountant side and the lawyer side, when it comes to contracts and that kind of thing, when we’re talking about freelancers. So, really, if it takes you a day to find a really great accountant to work with, it’s going to be more than worth it in the long term, so take the time to really kind of-
Jonathan Medows: I had clients that I saved money for on a routine basis. Sometimes I don’t. I make sure they’re getting it right, whatever right is. So it’s not always about money. It’s also about preventing aggravation or heartache later on.
Abbey Woodcock: Yep, absolutely. Okay, Kimberly, “If you’re on a shared plan, such as a cell phone, can you deduct your portion, or do you need to be listed as the owner of the plan?”
Jonathan Medows: If you’re paying for it and you can justify it, I would take it. If you feel uncomfortable, don’t ever do anything that you can’t justify. But, even if you take it, and again, that’s your percentage and it’s only used for business. So you can’t take full unless it’s fully used for business.
Abbey Woodcock: Perfect. Jenn is over in the chat. I’ll skip to her question because I don’t think she’s been able to get the Q&A working.
Jonathan Medows: Sorry guys.
Abbey Woodcock: “So, I have income from social security and freelance income as well as W2 income. Where-”
Jonathan Medows: Social security, freelance, and W2 income, correct?
Abbey Woodcock: Correct, yep. “Where might my exemptions and social security deduction interplay?
Jonathan Medows: Social security … So, essentially, social security becomes taxable when you earn a certain amount of income. I don’t know the woman’s age, I don’t wanna ask, you may … There’s certain rules when you’re under a certain age and you have earned income, you may need to pay back social security as well. Find someone who specializes in social security taxes.
Abbey Woodcock: Perfect. Okay, let’s see. “Speaking about locations, I’m from the U.S., but working overseas the majority of the year-”
Jonathan Medows: Okay, good question.
Abbey Woodcock: “I know I need to speak with an accountant, but is there anything I should keep in mind?”
Jonathan Medows: Yeah, stay out of the country for more than 330 days of the year, and some of that income may not be taxable.
Abbey Woodcock: Perfect. 330 days.
Jonathan Medows: Yeah, 330 days. Feel free to call or email me, it’s one of the areas I’ve been working, in addition to the freelancing world.
Abbey Woodcock: Perfect. That’s good to know. This comes up a lot. I know we have a lot of, like, digital nomads in our community.
Jonathan Medows: Yeah, but stay out of the country for more than 330 days, guys, if you’re in the U … and you don’t have to be a calendar year. So let me just speak to ’em a minute about this. So, essentially, if you’re outside of the U.S. for 330 days, some of your income will be excluded. It doesn’t have to be the calendar year, but if it’s a partial year, you’ll get a partial exclusion. So you can save some major money.
Jonathan Medows: Where I have an issue is, people are going back and forth, and we can’t avail ourselves of that and then, for whatever reason, they’re not paying taxes in their host country, so they don’t get a credit. And they wind up paying through the nose.
Abbey Woodcock: Perfect, that’s really great. That’s really good information that I know a lot of people have been asking about in our community. Let’s see. I’m working on a list of questions that, okay. So.
Jonathan Medows: I’m from New York, by the way, sorry if I talk fast, it’s just how we play here. My apologies.
Abbey Woodcock: I’m upstate New York, but my-
Jonathan Medows: Different animal.
Abbey Woodcock: My husband is Jersey, so he’s more the New York talker. Whenever we go over the border, I always say, “Your Jersey is showing, because he talks louder, and he gets more aggravated.”
Jonathan Medows: Different animals, sorry. And this is the type of thing that I get asked four or five times on a given day, so, yeah, I’m pretty passionate about it, but the autopilot kicks in, and I kinda answer it that way.
Abbey Woodcock: Absolutely. So, any other questions? I think we covered that one. Kimberly, I see you said, “Didn’t catch that.” I’m not sure what you meant by that. If you wanna clarify, we can repeat anything that you missed. Let me see, let me just look in the chat to make sure most of that about what to do for the foreign client. Okay, he said just, you just-
Jonathan Medows: Just report the income. It’s taxable income. You report it, just like if I paid you five … Oh, okay, I think I am … I think I know what you’re asking me. You’re asking me, “Hey, I didn’t get a 1099 from this client. I don’t know how to report this income.” It still should be reported on Line 1 of Schedule C as income.
Abbey Woodcock: Perfect, okay, exactly, and the other point that you made that I think is a good one is that, knowing how they have to report their expenditures is kind of their concern, and you just have to worry about reporting income.
Jonathan Medows: You just have to worry about what your responsibility is. You don’t need … They don’t have to issue you a 1099. They may not have U.S. tax [inaudible 00:41:20], but you still need to report that income.
Abbey Woodcock: Perfect. Oh, okay, one more question. Jenn. “When it comes to a self-directed 401(k), if I set that up now, does that benefit me in 2018 or in 2019?”
Jonathan Medows: If you fund it in ’18, it will help you. You should speak with someone immediately, before year-end, to determine whether … Some of these plans, you can fund by April 18, 2019, to get a 2018 tax advantage. Some of them, you may need to fund by year-end. Some of them, you may have already needed to set up by end of October. Speak to Fidelity, speak to Vanguard, speak to your financial advisor. I would do so before year-end, find out what you need to do, if anything, prior to year-end.
Jonathan Medows: You may need to set up a plan, even if you don’t have to fund them before year-end.
Abbey Woodcock: Perfect. Heather says, “What about paying taxes quarterly? I typically do this, but this year I skipped Q2 and Q3 payments. How worried should I be?”
Jonathan Medows: Let me break it down in two parts. The first question that comes to mind for my clients is the penalties. If you pay by January 15, the missing monies, that will mitigate a lot of the penalties. I wouldn’t be so concerned about the penalties. You may have $100, $200. I wouldn’t be so concerned about that. What I would be concerned about is you’re gonna get a nasty tax bill in April unless you try to catch up and save money to pay those estimated payments. That’s where I see a lot of freelancers get into trouble. They don’t budget the taxes into their budget model, and they don’t put things aside, and they spend it, and when you get a tax bill at year end, $6,000, $8,000, $10,000, $20,000, whatever the number is, it turns into a crisis.
Abbey Woodcock: Right, perfect, and just so everyone on this call knows, we actually have another call in mid-January with Mike Michalowicz. He is the author of the book “Profit First.” He’s going to talk to us a little bit about setting up those accounts and making sure that we’re saving in taxes. It’s gonna be kind of a basic business finance planning call, so that’s another thing we have upcoming if you’re not sure how to save for taxes or how much to save for taxes or what-
Jonathan Medows: Set aside 30% to a third of your profit. That’s a good number. Or set aside a percentage of what comes in every paycheck. 25%. Those are good baby first steps. I don’t mean to interrupt Abbey, but just get in a habit of putting money aside.
Abbey Woodcock: Perfect. Awesome.
Jonathan Medows: I’m sure Mike’s gonna be giving you a more elaborate answer. I find that, for a lot of freelancer clients, they need simple directions, not because they’re simple, it’s because they’re so complicated in their other lives, they just need quick answers so they can make decisions and move forward.
Abbey Woodcock: Absolutely, 100%. Perfect. Let’s see. Heather. “I was trying to gamble on not having a lot to pay in April.” Yes, perfect. Okay, great, awesome, so any other last-minute questions before we wrap up? Again, we went through a lot of material really quickly, so you will get the recording and the transcript so that you can review it. And also, Jonathan, I do wanna give you a minute, if they are located in New York City, how can we get ahold of you? And that kind of thing. And I know you have a great blog also, with a lot of this information.
Jonathan Medows: Thank you. So, I work with clients nation-wide and internationally. I just have a New York focus, but I don’t necessarily need to do New York. I get the Midwest. I get the West Coast. Cpaforfreelancers.com is my site. I have a “Contact Us” button if you have questions. Our site has a lot of good tax reform materials. I’ve been writing articles for the past year. It’s a free resource. Feel free to avail yourselves of that. We have other articles as well. We are gonna be writing weekly articles through the end of tax season, because this is when people are interested in the topic. So cpaforfreelancers.com, there are contact buttons. I’d be happy to speak to anyone if anyone has other questions that wish to speak to me privately.
Abbey Woodcock: Perfect. That’s such a great resource for everyone. Like I said, that’s how I found you, through an article that I saw that you had written. Then I got on your blog and realized that this was information that everybody in our community needed to have, so cpaforfreelancers.com. And, again, you all that are on the call today will get an email from me with the recording and the transcript of this call, and I’ll include Jonathan’s contact info in that email, as well.
Abbey Woodcock: So, thank you so much for coming on with you. Oh, there’s a couple … Did we miss put aside…
Jonathan Medows: Go for it, I have time.
Abbey Woodcock: Let’s see, “Do you work only with New York State clients?” So, he said no.
Jonathan Medows: No.
Abbey Woodcock: He works with anybody. “Put aside 30% of your income before or after expenses?”
Jonathan Medows: After, if you’re conservative, 25% before.
Abbey Woodcock: Awesome, okay, great. Well, thank you very much, and, again we’ll send out that recording as soon as it is available, and we will see you guys again soon. Thank you so much, Jonathan, I appreciate it. Cpaforfreelancers.com for more from Jonathan.
Jonathan Medows: Thank you guys. Take care, everyone, have a good holiday season.
Abbey Woodcock: Thanks. Happy holidays, everyone.