Tax Tips

What taxes do freelancers have to pay?

noreply@blogger.com (Scott) — Tue, 23 Feb 2010 02:16:00 +0000

Today's question comes from Elizabeth in Ohio.

Q: I was laid off from my job last year and began working as a freelance web designer. What kind of taxes do freelancers pay and what kind of return do I file?

A: While we never like to hear about anyone losing their job, especially in these challenging times, we salute your resourceful spirit and hope your new career is going well.

As a freelancer, you're considered an independent contractor by the IRS, and you must pay income tax, Medicare taxes and Social Security, state taxes and local taxes, just as other workers do. Lucky for you, freelancers don't pay unemployment insurance (nor can you file for unemployment!). But you may also be required to pay a self employment tax if you make $400 or more as a freelancer.

Remember too that when you work for someone as an independent contractor, they don't withhold taxes but they do report your earnings to the IRS.

Many freelancers file taxes quarterly unless they prepay, in which case they can file annually.

Working for yourself comes with some signficant benefits though. Your business expenses are tax deductable, including the costs associated with your home office (mortgage or rent) and equipment you use to run your business like computers, cameras, cell phones, car mileage, etc. Make sure you keep track of whether or not these are used exclusively for business purposes or if they are also used for personal reasons. If you use business assets for personal reasons you can only claim deductions for the percentage used in the course of business.

How can I file my taxes for free?

noreply@blogger.com (Scott) — Tue, 23 Feb 2010 01:18:00 +0000

Today's user-submitted question comes from Mike in Vermot. Mike would like to learn more about some free tax filing options that he can take advantage of.

Q: I don't have a lot of money to spend on tax preparation. But I'm certainly not a tax expert. Can you suggest some options for filing tax returns for free?

A: Back in the old days, tax prep was a chore. It involved pens, pencils, calculators, scratch paper, boxes of receipts and sometimes bottles of aspirin and perhaps a tissue or two to dry the tears.

But today, the web is awash in options for filing your taxes for free. Tax preparation companies and tax software companies offer all sorts of free software in the hopes that you'll try and use their product, keeping them in mind for future, more complicated filings which you'll be willing to pay for. The U.S. federal government has even gotten in on the act. The IRS' e-file system is designed as a simple, easy-to-use method for filing your free tax return.

A few free filing options to consider:

What are the tax benefits of a 529 plan?

noreply@blogger.com (Scott) — Wed, 11 Nov 2009 15:08:00 +0000

Today's question: "What are the tax benefits of a 529 college savings plan?"

Answer: An IRS section 529 college savings plan is a state-run investment program that allow folks to save money for higher education in an account. The earnings in this account grow free of federal income tax and, when used to pay for qualified higher education expenses, may be withdrawn without having to pay federal taxes. It is potentially an extremely valuable tool for saving for college for you or your children.

Click here to read more about the 529 plan itself.

As far as federal tax benefits go, it's important to remember that 529 contributions themselves are not deductable from your yearly federal tax bill. BUT, after you make your contribution with after-tax dollars, your earnings in the 529 plan grow tax-deferred. So long as these dollars are used for qualified higher education expenses under IRS Code Section 529.

Examples of qualified expenses include tuition, some mandatory fees and books. A student's dorm/boarding expenses are also covered if they are enrolled at least half-time. Please read the previous link to the IRS page for more details on qualified expenses.

The earnings on withdrawals not used for qualified expenses may be subject to federal, state and local income taxes and possibly a 10 percent penalty.

On a final note, I won't address all of the drawbacks to 529 savings plans, but I do suggest doing research on what happens to your 529 account if a child decides not to pursue higher education or if they receive scholarships that cover their tuition and expenses. This is worthy of consideration.

What types of earners have to pay estimated taxes to the IRS?

noreply@blogger.com (Scott) — Sun, 08 Nov 2009 13:52:00 +0000

Today's user question: What types of earners have to pay estimated taxes to the IRS?

Answer: First, it's important to understand what estimated tax is. Simply put, estimated tax is what you use to pay your taxes if your income/earnings are not subject to withholding. This is a common practice among the self-employed and may also be used for a variety of other reasons such as dividends and interest earned on investments and savings, rental payments, prizes, alimony, etc. In some cases, if your employer is not withholding enough from your salary you may also need to pay estimated taxes.

Note that if you don't withhold or estimate enough in tax payments and make those payments by the due date each period, you may be penalized by the IRS (yes, I know this sounds unfair, and I agree that it is!).

You are required to pay estimated tax if you expect to owe the IRS at least $1000 in taxes for the current year and you believe that the withholding from your income subject to withholding tax, along with any credits, will be less than 90 percent of the tax to be shown on your current year's tax return or all of the tax shown on your previous year's tax return (whichever of the two is smaller).

The IRS has more information here.

What information should go on my W-4 form?

noreply@blogger.com (Scott) — Fri, 06 Nov 2009 14:41:00 +0000

Today's reader submitted question: "What kinds of information should I include on a W-4 form at a new job?"

Answer: W-4s are a type of IRS form that you use to provide information to your employer so that they can withhold the proper amount of federal income tax from your wages/paycheck.

The W4 is completed by an employee based on his tax situation, number of exemptions, filing status and other factors.

You, as the employee, should state the number of exemptions you are claiming and note your withholding status as single, married or head of household.

Claiming one allowance is usually the norm for younger tax filers. If you prefer that the government withhold more of your money you could also claim zero allowances.

Depending on the state in which you live, a separate withholding statement should be completed.

The more allowances you claim, the less federal tax is withheld. If you withhold too little, it's possible you may owe more come tax day, depending on your income, filing status, etc. For this reason, you should always be truthful and accurate when claiming withholding allowances.

What will happen if I don't file my federal taxes?

noreply@blogger.com (Scott) — Thu, 05 Nov 2009 12:25:00 +0000

Getting back to blogging after a very long break, I noticed a question from Mike from Los Angeles, Calif. that seems to be a very common one. His question was, "What will happen if I don't file my federal taxes?"

Mike and everyone else - individual taxpayers/earners must file a return and pay their taxes owed no later than April 15. This is the law. There is no way around it and if anyone tells you otherwise (about conspiracies, Constitutional loopholes, etc.) they are incorrect.

If your taxes aren't paid or a filing is submitted late, it is subject to late fees and tax penalties. Taxes that are severely delinquent are indeed subject to enforcement action by the IRS, including wage garnishment, a federal tax lien or levy on property until the taxes are paid. If you can't afford to pay all your taxes at once, the IRS will even consider setting you up on a payment plan that is more manageable (although you may be charged interest or other penalties).

Folks, just be sure to file a tax return each year. This is a sure way to remain on the good side of the law. I know this was a pretty obvious fact to most of us. But it's always good to remind folks who may be filing for the first time or are considering not filing for whatever reason.

Will the IRS curtail contribution limits on 401k plans?

noreply@blogger.com (Scott) — Mon, 31 Aug 2009 21:13:00 +0000

This article from MarketWatch.com indicates the U.S. Internal Revenue Service may be poised to decrease statutory limits on pre-tax contributions to your 401k account.

Nothing is set in stone yet. But this may have tax implications for some of you who are already contributing the maximum amount allowable to your retirement fund.

Update to my previous post

noreply@blogger.com (Scott) — Mon, 02 Mar 2009 22:03:00 +0000

I'm updating my previous post. I received my federal individual income tax refund by direct deposit on the morning of February 27, 2009 - right on schedule.

Is everyone else out there seeing a similarly consistent experience with their filings and refunds? Feel free to post your comments to this blog and share your experiences.

2009 tax refund schedule

noreply@blogger.com (Scott) — Tue, 24 Feb 2009 14:28:00 +0000

For any of you folks curious about the status of your 2008 tax year refund (for a return filed in 2009), I thought I'd update this blog with the story of my tax return this year.

I filed a rather complex return on Sunday, February 15, 2009. Based on my return, I was expecting a refund from both the federal government and the State of Ohio. The feds accepted my return the same day I filed. The state accepted shortly thereafter.

I was originally told by H&R Block's Tax Cut software that based on info from the IRS, I could expect my federal refund to be direct deposited into my bank account on or before February 27, 2009. Hoping for "before" rather than "on" the 27th, I've kept an eye on my bank account and on the IRS website. When checking my filing status on the Tax Cut software yesterday, I followed a link to the IRS website section dealing with tax refund schedules and noticed that the date for the anticipation of my federal refund was now Tuesday, March 3. I'm not sure why this changed and there was no explanation. I have business related expenses I'd like to apply this refund to, so every day counts for me.

Lo and behold, I checked my bank account this morning (Tuesday, February 24, 2009) and discovered that the State of Ohio had deposited my tax refund. This rapid turnaround just nine days after initially submitting my return is very welcome indeed. Considering the problems folks in California and Kansas are experiencing with receiving their tax refunds, I can consider myself lucky (Just like Kansas and California, Ohio and many other states are battling potential budget deficits this year).

A quick check of my banking records from last year showed that exactly three days after Ohio deposited my refund, the IRS deposited my federal refund. Assuming that both agencies are following the same type of schedule this year, I expect to see a deposit from the IRS on Friday, February 27, 2009 - the exact date H&R Block originally told me to expect my refund.

Obviously it's better to get a small tax refund or no tax refund each year, rather than pay too much tax to the state or federal government and later get your money back in the form of a tax refund. But if you are waiting on your tax refund, hopefully my experience will be reassuring to you. It seems that our taxing authorities are doing their best to process returns and send out refunds in a timely manner.

Do you have to file a tax form to receive the federal tax rebate recently approved by the government?

noreply@blogger.com (Scott) — Fri, 15 Feb 2008 13:04:00 +0000

Q: Do you have to file a tax form to receive the federal tax rebate recently approved by the government?

A: Well, in a way, yes. You need to file your 2007 federal tax return. The Internal Revenue Service will use information on your 2007 return to determine how much a taxpayer you're eligible to receive.

The IRS will begin sending payments in May. Taxpayers who file late or after filing an extension will receive payments later. No rebate checks will be issued after Dec. 31.

If you don't normally file a return, it's still important that you file this time. Recipients of Social Security, specified railroad retirements and certain veterans' benefits should report those amounts on Line 14a of Form 1040A or Line 20a of Form 1040. Taxpayers who already have filed but failed to report these benefits can file an amended return by using Form 1040X.

Tax Tips

What taxes do freelancers have to pay?

How can I file my taxes for free?

What are the tax benefits of a 529 plan?

What types of earners have to pay estimated taxes to the IRS?

What information should go on my W-4 form?

What will happen if I don't file my federal taxes?

Will the IRS curtail contribution limits on 401k plans?

Update to my previous post

2009 tax refund schedule

Do you have to file a tax form to receive the federal tax rebate recently approved by the government?

Changes to your last name

Tax deductible education expenses

Tips for rental property taxes

Tax deduction for home equity loan

Questions about the application of the death tax

When should an independent contractor file an IRS Form 1099?

Is the money in a trust I inherited taxable?

Tax-deferred alternatives to a 401k plan

Income tax refund loans are not a good deal

Garage sale profits are taxable income

Filing tax returns for minors

Researching property tax liens

Taxable gains on investment property sale

Statutes of limitations on filing returns, claiming refunds