Ask HN: How to handle taxes on a larger freelance contract

6 pointsraoul_duke12y ago4 comments

A friend of mine recently landed me an opportunity to earn some side cash developing an application and a few small website overhauls. I have been programming for almost ten years now and when I was younger I worked with some small businesses on freelance contracts. Back then, they were people that I knew and I didn't worry too much about taxes because the amount I got was minimal. Now though, I'm in a position where I will be earning a good amount of money from these and I wanted to be sure that I was doing this right in terms of taxes and other things I may overlook when accepting money for work.

Could anyone give me some pointers on how to handle this contract properly so I won't have to worry about this at the end of the year?

4 comments

codegeek12y ago

Where do you live ? Taxes are location specific so please specify that before you can get any meaningful advice.

EDIT: As you confirmed that you are in Floride/US, here is my advice being a self-employed myself:

1. Find a good competent CPA/tax advisor who is local and understands floride specific rules. Ask to have an initial consultation. This is very important because it will save you a lot of hassle in the long term.

Now, you are probably looking for more than "find a damn CPA" but that point is still critical. I will now give you some pointers on what are some of things to research about this.

1. How/what will you do business as ? Will you just be yourself aka freelancer/1099/sole prop/dba OR will you actually do business as a corporation/LLC ? It is hard to give specifics on the internet but start learning the diff b/w 1099/LLC/DBA/Corp/S-Corp. Depending on your need, you may need one or the other. In general, the idea of doing business as is not just about tax consequences but also about liabilities. For example, as yourself/1099, you are exposed to the highest level personally while as corporation, you personally are exposed the least (again a general rule but depends on cases). In terms of taxes, again usually by yourself/1099 will make you pay the highest tax but has least adminitrative burden of other expenses like payroll, accounting etc. So it is all about the balance between one or the other end.

- Will you need general liability insurance ? This is most likely needed for most big contracts. Look into this. I buy mine from http://www.techinsurance.com (no affiliation. they are just a broker who gets u a good deal)

- Other than general liability insurance, you also might need "Errors and Omissions" insurance a.k.a E&O. This is not required unless you are working on mission critical projects where you are liable for coding errors etc. techinsurance.com also has that.

- You will need to run payroll. The idea is that your company will pay you a salary (W-2) and any other benefits. If you are corporation, you have more flexibility in how much to pay as a salary vs other benefits but on 1099 etc, you don't have that flexibility.

- Let me try and give you a general idea of taxes that you might have consider:

  - Personal Income tax: This is the usual federal+state+local taxes that you pay as employee on paycheck.

  - Payroll Tax: You will have to pay Social Security tax, medicare tax as both employee and employer. It comes down to about 7.65% for each (SSN 6.2,Medicare 1.45) employee and employer portion making it total of 15.3%. Btw, SSN tax is limited to upto 117,000 (2014 limit) so if you make more than that, you don't pay SSN on the extra. You pay medicare on entire earnings. BUT, again the question comes down to 15.3% of what ? on 1099, you have no choice but to pay 15.3% of *entire* income. with S-corp etc, you can control how much you pay on W-2 and these payroll taxes are then calcualted on that number. But beware, if you pay yourself too low a salary to save on payroll taxes, IRS comes after you. So a reasonable salary should be paid. What is "reasonable"? Not defined very hard but usually market rate for your skillset. 

  - Other taxes related to your business. This can be anywhere from corporation taxes, umemployment insurance, disability insurance etc. All this goes out to IRS.

- Retirement plans: as self employed person, you can setup retirement plans with companies like fidelity etc. One benefit is that you can put more than the usual employee limit (17,500 for 2013) because you can also contribute a employer portion (upto 25% of earnings) but the total is capped at 50,500 (2014)

So there is a lot to this. Like I said, best bet is to talk to a CPA and go from there.

raoul_dukeOP12y ago

Thanks for the advice. I had a feeling it wasn't an open and shut thing. I'll be looking for a CPA for sure.

raoul_dukeOP12y ago

I live in Florida.

philiphodgen12y ago

Yes find a good CPA. But here is how you make sure you put aside enough money to pay your taxes. The worst thing in the world is running a tax return and finding out you have a very large tax bill due but unfortunately the money is all gone. Magic, it is. I have experienced this. A six figure tax bill and no cash? You're working all next year to pay last year's tax bill.

You can pay estimated tax online with the IRS. Set it up for yourself so you can do that.

The IRS says you must do estimated tax payments quarterly. Fuck that. I don't have the discipline to save money for three months then send a big payment. Some sort of character flaw.

I pay every two weeks. Online. I estimate my net profit and divide by two. Send the money. Bang.

Lots of small payments add up. Small payments are less painful. Don't worry. The IRS will keep track of all the payments you make.

Periodically I check my guesses against reality. I do monthly and quarterly financial reports and see if my guess x 50% is too high or too low. Adjust as needed.

The important thing is to get close to the actual tax due. You do not have to be perfect. If you owe $75,000 in tax and you have deposited $60,000 already, that final lump is easier to handle.

TL;DR - Frequent small deposits with intermittent course corrections. Aim for getting close to your actual tax bill, whatever your definition of "close" is.

Disclaimer: I'm a tax lawyer who has really struggled with this personally over the years.