Moving to freelance--Do I incorporate myself?

[Dale Cooper]

Searching for advice from people who have been through this or know anything about it:

I'm on the verge of changing jobs, and my new one will pay me as if I'm a freelancer -- no taxes taken out, no benefits, etc. How have some of you handled this, and what would you recommend? Do I incorporate? Does it matter? How much can I write off?

Thanks in advance,
Dale

 

[somewriter]

Virtually any expense that has a business-related portion is deductible, including the portion of your house from which you work. I would consult a CPA for details; you will be hiring one to do your taxes if you're asking these kinds of questions.

 

[Andy Dufresne]

Great question that merits some serious research. I was considering this move myself, but the notion of filing that quarterly self-employment tax (or whatever it's called these days) has always been a formidable deterrent. Perhaps incorporation could be our saving grace.

 

[jgmacg]

I really think it depends on how much you think you'll be earning and under what circumstances. Incorporation is certainly an option, and offers a lot of higher-end tax benefits. It is, though, a complicated (and sometimes complicating) process depending on your personal tax needs, relative to things like retirement, investments, home ownership, etc.. It can also be expensive, depending on where you're located and what sort of corporation you form.

The fact is that if you're earning the bulk of your income from 1099 work, the IRS is going to treat you like a small business anyway. In other words, you are entitled to the same breaks and deductions as any other small business - you just need to learn what they are.

So maybe for the first year of your new freelance undertaking, see what you earn. Learn about your new tax responsibilities and entitlements as a small business. Try a tax preparation program like Turbo Tax for Small Business (it'll walk you through the steps - but knowing how much you spent on what is still up to you.) If, after a year or two, it seems like you're getting shortchanged, or it's too much work, then consult a CPA and/or attorney about incorporation.

 

[JayFarrar]

I don't believe that you can form a PA without a professional license number. Incorporation gets a little trickier, but I don't think a regular writer can without jumping through some serious hoops.
As far as deductions go, you need to get the square footage of your house and then the square footage of the room you work in and that's the percentage you can deduct. So if you live in 1,000 SF and your home office is 200 SF, you can deduct 20 percent of your home-based expenses like rent/mortgage and utilities. If you have a business line, you can deduct all of that, but if you have one line, you can only deduct 20 percent of the bill. Don't even get me started on a cable modem.
That room also has to be exclusively a home office, it can be a spare bedroom, but it can't have a bed, that sort of thing. And the IRS has been known to make inspections
The problem with business expenses is that they need to be more than 2 percent of your AGI or adjusted gross income after you take out the standard deduction. It is an impossibly hard number to hit if you haven't made a major purchase like a new computer.
Best thing to do is talk to a friend who is a CPA and get some advice.

 

[Dale Cooper]

Thanks all. I think my brother might have some CPA friends. I guess I'll check in with them.

 

[lono]

Form an LLC - limited liability corporation. Simpler and easier than incoporating. But by all means have a CPA explain all the options to you.

 

[HeinekenMan]

I'm about to buy a house, and it's my understanding that it's tough to get a loan when you're self-employed. Things improve dramatically if you incorporate. Suddenly, you are your own employee, or something to that effect. But I believe you have to jump through some hoops. I can let you know in a few months.

 

[In Exile]

Make sure you get an accountant completely familiar with the Business use of Home deduction, and there is a brief IRS handout I nabbed at the Post Office one day. I've been doing this for years, but each year at tax time there are still usually 4-5 things I have to ask the accountant about. Like can the home office percentage from the cost to have more gravel put on my driveway, or the cost of my plow to keep it clear.

In both cases, the answer was yes. I was also able to buy a house the same year I went freelance full-time, with little problem, but this was when you could buy a house for about 1/4 of what you have to spend now. They'll still want 20% down, or some other equity, and proof you are making money. In my case, even though the raw $ numbers looked awful, a contract for a book was helpful, as was a mortgage guy who had experience working with non-traditionally self employed people, like artists. I used my retirement $ from my previous 9-5 job for the 20%. You might be able to do something similar.

 

[zeke12]

Form an LLC - limited liability corporation. Simpler and easier than incoporating. But by all means have a CPA explain all the options to you.

I think this would probably be the way to go.

I know people who have done this to buy rental properties, etc. and it seemed easier than incorporation.

 

[Dan Hickling]

Always show the IRS a profit.....

 

[beefncheddar]

Great question that merits some serious research. I was considering this move myself, but the notion of filing that quarterly self-employment tax (or whatever it's called these days) has always been a formidable deterrent. Perhaps incorporation could be our saving grace.

And that's coming from a guy that knows a little something about doing the books.

 

[Andy Dufresne]

Great question that merits some serious research. I was considering this move myself, but the notion of filing that quarterly self-employment tax (or whatever it's called these days) has always been a formidable deterrent. Perhaps incorporation could be our saving grace.

And that's coming from a guy that knows a little something about doing the books.

Yeah, and if they ever try to trace any of those accounts, they're gonna end up chasing a figment of my imagination.