This is a much-belated part two of my posts detailing some of the things I've had to discover and go through in the past few months while starting to do freelance work as a full-time gig. If you missed part one, you should probably take a look at that first.
Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes. — Benjamin Franklin, Letter to Jean-Baptiste Leroy, 13 November 1789
Taxes, something everyone grumbles about, often while driving down a taxpayer-funded road. When you set out on your own, you have to remember a few things.
First is that your "paychecks" and payments from your clients, however you are paid, won't have taxes taken out of them and forwarded to the IRS during the year. You will need some other method of staying current with your tax liabilities. That way is quarterly estimated tax payments; further details in the Common Forms section below.
Second, realize that being self-employed, you are now responsible for the employer's half of the Medicare and Social Security contributions. This is known as the Self-Employment Tax, and usually results in the IRS taking an additional non-trivial percentage of your income (15.3% in 2010, 13.3% in 2011).
1040-ES (pdf): This is the IRS form for making estimated quarterly tax payments. It includes a worksheet and four detachable forms, one per quarter you are required to pay estimates. Better than filling out this form and sending it in via snail mail is to sign up for EFTPS- this allows you to make these estimated payments online and have them directly debited from your bank account.
Your state likely has a similar form for state income tax estimates; for me it is the IL-1040-ES (pdf). Other than the amount and where you send the payment, the process isn't much different.
W-9 (pdf): A form your clients may ask you to fill out requesting your tax identification number, which is either your Social Security Number (SSN) or Employer Identification Number (EIN). This allows them to file a 1099 form with the IRS for you at the end of the year. I have a scanned-to-PDF copy of this form that I can give out since it requires no personalization for the client requesting it.
I highly recommend applying for an EIN so you don't have to give out your SSN. The process can be done entirely online.
1099-MISC (pdf): The only form of this bunch you do not have to fill out. You will likely get one of these from your clients at the end of the year if you previously gave them a filled-out form W-9. Keep in mind that if you receive a copy, so did the IRS, so good luck trying to hide that income.
- Because selling services is not considered to fall under the provisions of use tax, you shouldn't have to worry about sales tax. For me, this meant no Illinois Dept. of Revenue registration was necessary.
Getting an Accountant
Get. An. Accountant. It doesn't make sense to try and drown in all the new stuff you will have to deal with, even if TurboTax served you fine for the previous eight years (as was my case). Of all places, I used some reviews on Yelp to find an accountant that was reasonably close and got good reviews from other small business owners. Tax season is right around the corner here, so I haven't had much interaction yet but I was able to sit down when first starting my business and ask all the questions I wanted.
Opening a Bank Account
Once you have a business name (DBA), you should be able to open a business banking account in that name. This really helps keep your personal and business finances separate matters.
I went with Bank of America because they have a ton of locations in Chicago, one right around the corner, and I could get an account that would have no fees and even the possibility of some interest. I've yet to see that, of course. Look around at what your local banks are offering, be sure to scope out what fees each account type might entail, and make a selection.
Remember that you can always upgrade your account later if you suddenly have a need for higher-end features. Also realize that sometimes your account choices are limited by what kind of business you are. There are options available to a sole-proprietor that are not available if you are an LLC, and vice versa.
- Freckle – Time tracking, described in the previous post.
- Outright – Online bookkeeping, very helpful for tracking expenses although their UI recently took a turn for the worse.
Have questions about anything else? Be sure to let me know and I'll try to answer them!