1099-MISC is a requirement.

Hi June,

I am a self-employed web designer from PA.

I've been "indie" for 6 or so years and up until now, have never been asked to fill out a w-9 form and frankly, don't like sending my social security number to my (house painter)client, who will then give it so some accountant.

The client just emailed me and said his accountant wanted me to fill it out to be on "record". This is for a job that I completed 6-8 months ago and was paid for in full by his business check (a little over $700) made out to my name, as i have no business identity. I will pay income tax on what i made from him - and i don't understand why he can't write off my expense as a advertisement expense.

So do i have to give these people my social security number? And what are they going to do with it?

thanks for any info you could provide!

Amy
PA


Hello Amy,

Your painter client is correct and so is his accountant. You were supposed to have been receiving 1099s for "the last 6 or so years." 1099s W2s W4s W9s

Anyone who hires you is supposed to give you a W-9 to fill out so that he may have your name, address and social security # in order to send you a 1099-MISC a year-end.

Whether you are paid in cash or check or chickens if it's $600 or more you are supposed to receive a 1099-MISC.

Not wanting to give your social security # to someone for whom you work could be construed as paranoia or careful business practice.

If it's paranoia: Get over it. If it's careful business practice get a federal ID # and use that # instead of your social security #. EIN-employer identification #

Read all the posts in the links above and you will feel much better because you will understand that this is a required by the IRS.

-- June

You create it. You sell. You pay tax.

Hi June,

I am a web designer ... 8+ years.

Hi June. I was directed to your site from a friend who spoke very highly of your tax knowledge for the self-employed :) Anyway, I have a situation where a website I created/owned was sold to an individual in Australia for a fairly substantial amount of money. Its come time where I need to file taxes, and I was wondering what you thought might be the best way to claim the sale.

I've been told either: long-term capital gain or self-employment income. The situation is fairly sketchy, as the person I sold to is unlikely to report the sale, so I have no forms, etc. I'd obviously like to be taxed the least amount possible :)

FYI: I ran the site for fun for about 1.5 years before the sale. It was an online deal-finding site, with social elements.

Thanks!
Pete
Palo Alto, CA


Dear Pete,

I assume you are a self-employed web designer. The site you sold is your creation and so it is taxable self-employed income to you.

Couple other things: The fact that nobody is going to get any paper saying that you sold it for $XX does not mean it's not taxable. If you don't claim the income it's fraud. That's really not good.

And, you guys got to watch out for all that tax advice you get from Aunt Tillie. Capital gains income. Good golly!

Check out this similar question: Indies: Your creation is your work and is subject to SE tax.

Best,
June

You don't have to be a math whiz to figure out estimated taxes.

Hi June,

My name is Pete, from Boston, MA. For the past few months I've been freelancing as a web designer.

I've had a hard time finding the right information on estimated taxes. Basically, I've been just about scared away from continuing my freelance business and feel like cutting my losses, wiping my hands of this and finding a job that will give me a W-2.

The bottom line is: I've made about $10,000 total since I started freelancing in May, and I know I need to make a payment by September 15th. But I simply do not know how to figure out what amount I should be paying - even though I've researched endlessly (as you may have guessed - I'm not a math whiz). All the information out there on the web and in books seems to direct me to last year's taxes - 'take your adjusted gross income from last year, and...' - but I don't see how that's relevant at all when I just started doing this in May (also, I was a student most of last year).

Also, I can't figure out if my wife's income (she's a public school teacher) should come into play when estimating my tax payment.

I've spoken with a couple of accountants through personal contacts of mine, but I haven't gotten far on free advice. I've wondered if I need to just pull the trigger and hire an accountant to help me. I hope you can give some advice.

I found your site through searching 'can I pay estimated tax with a credit card', so you can imagine I'm sweating this quite a bit right now :)

Thanks very much for your time.

- Pete

PS - Even a quick answer like "You made $10,000, your estimated tax is $4,000" would be fantastic.


Oh my goodness, Pete. Stop sweating. First of all, nothing horrendous happens if you don't pay estimated taxes on time or ever. You may pay what you owe later on. And, you may owe some penalty and interest. Maybe.

Husband and wife typically file a joint return. Calculations are based on their combined income and expenses. Their total tax is based on their total income and various deductions.

If there is money coming in on which tax was not withheld -- for instance, dividends from investments [OK bad example at this time] let's say rental income from the beach house, well then estimated taxes may be necessary.

Or there may be large amounts of income on which no tax was withheld but perhaps there was over-withholding on wages that made up for it so no estimateds are required.

To determine estimated taxes you need to look at your entire tax situation.

That said, here's an example with real numbers. Plan on paying about 1/3 of your net income toward taxes. Could be more. Could be less. But that's a safe bet.

So if you had $10,000 gross income and only $1000 expenses against it then your net is $9000. So plan on $3000 to the feds and state government.

Or: $10,000 gross, minus $4000 expenses, leaves $6000 net. So only $2000 goes to taxes.

You said you're not a math whiz. If you had six bottles of beer and two friends and you wanted to share, how many bottles would each get? That's 6 divided by 3 = 2. Now add the zeros.

Here are two must read posts: Estimated Taxes and Estimated Tax: How much should I pay?

Do let me know if this doesn't help you with the sweats.

Cheers,
June

Very Simple Recordkeeping

Here's an abridged version of email I received from a distraught indie in North Carolina. You may be surprised at my response to him. Take a look.



June –

I am a self employed web developer and have really fouled up my financial life and have been in denial of the situation and desperately need to turn things around.

I don't see this as an excuse but I am young and being self employed kinda just happened and I have really messed up my financial life as the result of this. I am in need of help. No millions of dollars in debt kind of help but to the point where if I ever want to own a house or have decent credit I need to do something.

Often the most scary part of a situation is just not knowing where you stand and that is how it’s been with my finances, pretty sad but true.

I filed a return for 2005, though I pretty much owe money on all of them still. So hard to catch up on it once you get behind.

Mid year I started putting some money away in a CD so I couldn’t touch it, and didn’t think when I started it but I cannot get that money out until May.

I have to admit that with this stuff my brain just shuts off. It is difficult for some reason. I get overwhelmed by just the thought of taxes and my situation and all I need to do.

Do you still take on clients? If so, would you take me on as a client?

Jim in Raleigh, NC


Dear Jim,

The bad news is that you were in denial and your financial life is really fouled up. The good news is you're young so it can't have taken hold for so long that it’s unchangeable. If it's going to take time to straighten out, you've got a lot of years ahead of you in which to do it..

Before we talk about being a client or specific tax years. Let’s look at where you’re at and how to move out of that spot.

You’re a web developer so I'm sure your brain can handle taxes. It's not your brain that shuts off. The shut off valve is somewhere else. You need to figure out where it is and whether or not you want to turn it on.

A few days ago I went to meet with a website design/developer company in Santa Fe, Studio X . After speaking with the folks there and then coming home to tell my husband about it I realized that the relationship of me and my website is a lot like a client and his taxes . To have a good website, I can't just rely on the experts to do it. I must have a lot of input and do a lot of the thinking and planning myself. If I don't, my site won't do what I want it to. I have to make a choice about how much time and effort I want to put into it. Same with you and your taxes and recordkeeping.

You need to decide whether or not you want to learn about the money side of your business. You don't have to. All you must do is record and claim all income, and pay taxes. The government doesn't care about expenses if you choose not to deduct them. And if you decide that, for you, the time is better spent working rather than recordkeeping, then that's OK. The result: You spend less time on money chores but you spend more money on taxes.

You see you do have a choice.

Best regards,
June

To learn more about indie taxes and Self-employed Tax Solutions please visit http://www.junewalkeronline.com/

Web Designer Business Expenses

June -

I am a web designer and as such purchase software and use software programs at yearly fees for seo, host websites. I am at a loss to know which category software or web hosting go into using the self-employed list from Uncle Sam. Also what about domain registration. I would greatly appreciate your input.

Thank you.
Joan, Scottsdale, AZ


Hi Joan,

All the expenses you mention are deductible. And because they are legitimate deductions, even if you put them in the wrong expense category, you would not lose the deduction in an audit.

Software purchase or yearly fees can go into the supplies category. Or they could be other expenses: software yearly fees. Were I doing your return, I would look at your total supplies cost and your total software costs. If both were high I'd keep the two expenses in separate categories. Likewise, fees for your clients can go into other expenses: client hosting and other expenses: client domain regis.

Hosting costs for your own site could be advertising expense.

Whatever you choose, be consistent from one year to the next.

Best,
June