Still, even if you’re among the most tardy and disorganized of freelancers, at least you can count on the media to help out, offering their annual onslaught of articles peddling tax tips for the self-employed. To save you time we’ve sorted through them to weed out the obvious (that guy who says he can get you your refund in two days? Yeah, he might be a scammer) and the repetitive (keep your paperwork in order, people!) to find the few less expected gems. Primary among them this year is the SEP IRA.

Accountant Neil Johnson told Business Insider that opening a Simplified Employment Pension IRA funded from freelance income could help reduce income tax. Both the Chicago Tribune and SmartMoney agree, with the latter offering more details about who should look into a SEP IRA and how to do so:

Establish SEP for Big 2011 Tax Break. If you’re self-employed and have not yet set up a tax-favored retirement plan for yourself, you can establish a simplified employee pension (SEP). Unlike other types of small business retirement plans, a SEP can be created this year and still generate a large deduction on last year’s return. In fact, if you extend your 2011 return to October 15, you’ll have until that late date to take care of the paperwork and make a deductible contribution for last year. The deductible pay-in can be up to 20 percent of your 2011 self-employment income or up to 25 percent of your salary if you worked for your own corporation. The absolute maximum amount you can contribute for the 2011 tax year is $49,000. To establish a SEP, go to your bank or brokerage firm and fill out Form 5305-SEP. It takes five minutes. But don’t jump the gun. You may not want a SEP if you have employees, because you would probably have to cover them and make contributions to their accounts. That might be too expensive. Bottom line: if you have employees, don’t start up a SEP without consulting your tax pro.

Besides endorsing the SEP idea, the Tribune also suggests a crafty way to approach sorting out your health insurance via a suggestion from TurboTax: “if you hire your spouse and give him health care benefits, you can put yourself on his health care policy, which saves money on self-employment income and tax. Similarly, if you hire your dependent for clerical tasks or even to clean your home office, the wages will be deductible for you, and if their earned income is less than $5,800, they won’t owe any tax on the money either,” writes Anya Kamenetz in the article.

Of course, just because these are the less obvious suggestions, doesn’t mean the usual advice doesn’t remain valuable. It might sound like nagging to hear, once again, how important it is to get professional help and remember all your deductions (the Tribune offers a helpful run down of broad categories to keep in mind) but people still mess up the relatively straightforward aspects of filing. A recent study, for example, revealed that the most common small business tax mistake was mixing personal and business expenses. We all know you shouldn’t but apparently many of us still do. LearnVest helpfully compares specific scenarios that are perfectly alright to those likely to trigger an audit.

So good luck to late filers, remain vigilant on the basics, and try out some of these slightly more advanced tax minimization efforts  if they seem right for you.

Are there any other less well known tax tips that have helped you trim your bill?

Image courtesy of Flickr user Mat Honan.

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The two senators from Connecticut, a hotbed of remote work double taxation for professionals employed by companies in nearby New York who actually do their jobs from their leafy Connecticut communities, introduced a bill to eliminate the double penalty this week, according to a blog on political site The Hill.  The post by Pete Kasperowicz reports:

Sens. Joe Lieberman (I) and Richard Blumenthal (D) said the Telecommuter Tax Fairness Act, S. 1811, would help encourage telecommuting, which could create jobs, relieve traffic congestion and reduce the demand for gasoline.

“Although most states tax telecommuters on the percentage of time worked within that state, a few other states tax 100 percent of the income of nonresident teleworking employees whose companies are based in their state, regardless of the amount of time they are physically present in that state,” the two senators said.

“Consequently, because telecommuters’ home states can also tax the income earned at home, workers nationwide are threatened with double taxation on that income,” they added. “This double tax risk puts telecommuting out of reach for many Americans.”

Kasperowicz offers no information on how likely it is that the proposed legislation will actually become law, but as the bill was introduced at least as early as 2009 and never made it out of committee, it doesn’t appear that being a common sense measure is enough to ensure swift passage.

If you’re feeling fired up to support the bill, there is a petition online.

Does the government do enough to support telecommuters?

Image courtesy of Flickr user Enter The Story.

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It is important to understand that our work takes place in a system. In this case, the system is shifting quickly and is not well understood. Individuals, organizations, states and countries (recall the recent e-G8 meeting in Paris) are all trying to both understand and create reality in the Internet-enabled world.  To be an effective web worker, it is vital that you think about the whole system that you work in, not just the critical dimension of the moment. Here are five dimensions to consider as you think about your own work in this system:

• People. Who are the people that you must engage with? Knowledge, skills, abilities, preferences.
• Organizational process. This includes policies, procedures, workflows, and standard ways of operating.
• Organizational structure. The organization chart/reporting structure that you work within, which is often a good indicator of what an organization thinks is important.
• Technology. Both electronic and physical, on-hand or available.
• Context. The legal environment, your organization’s strategy (early mover, follower, growth, etc.), whether your organization is local/global, etc.

To make effective decisions about your work, understand that you can never change just one thing. There is no such thing as a single silver bullet that will solve a problem. Fredrick Brooks, summarizing the issues in a classic 1986 article, writes, “There is no single development, in either technology or in management technique, that by itself promises even one order of magnitude improvement in productivity, in reliability, in simplicity” (pdf). Even just changing from one email client to another has a human learning curve and may also affect your workflow.

Do a quick mental scan of the five dimensions in your situation. Focus on the two or three that you expect to have the greatest initial impact (this keeps you in tune with another piece of advice: go for small wins rather than stretch goals) and will help you understand how things are working. If you change everything at once it is difficult to track the causes and outcomes.

For California residents, our context has just shifted. The most effective web workers had this possibility on their radar well before receiving the letter from Amazon and were proactive about their options and how the different dimensions were part of those options. For example, they have been lobbying their legislators, hopefully considering multiple dimensions as they thought about how to persuade them: Understanding their particular legislators’ priorities and the organizational process to reach them. For some, moving to a different state may be an option, and again, multiple dimensions should be considered: The human costs of moving, supplier costs of moving, whether the new locale is next in line for a tax change. There will be no one right answer for the web workers affected by this change. The only “right answer” is that for this adjustment, and any other organizational decisions that you must make, you need to consider the entire system as you come to your understanding and choices. You can never change just one thing.

How are you preparing for changes in your working environment, regardless of whether or not you live in California and/or were a member of the Amazon Associate program? What were the dimensions you considered as you thought about the future?

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The Home Office Deduction

The home office deduction can be a particularly difficult expense to deduct. The issue is that while many web workers do use at least a part of their home as a work space, they don’t do so in a way that the IRS considers acceptable for claiming it as a deduction. A home office must be used exclusively for business purposes in order to write off a percentage of your utilities, mortgage, rent or other expenses.

That means you can’t use the same area for handling personal tasks, like writing a letter to Grandma. Your kids can’t play in the same room — even if you need to be able to keep one eye on them and the other on your work. Admittedly, the odds of the IRS stopping by your house and checking just how exclusively you use your home office for work are pretty low, but with taxes, it’s generally best to be safe rather than sorry. A tax preparer can help you make sure you’re on the safe side.

Your Employees

If you’re telecommuting as a full-time employee of a business, your taxes aren’t going to much more complicated than if you were going into the office every day. But if you run your own business, things get more complicated. If your business has grown to the point that you have employees — whether or not you see them in person — it’s generally best to start talking to a tax professional that can help you through the paperwork.

Changed Status

While you may not need to have your taxes entirely prepared by a professional, it’s generally worth at least consulting with a tax pro if your situation has dramatically changed over the last year. Even something as simple as switching to telecommuting full-time can be worth a call. Not all tax software can identify every single deduction or credit that might be available to you and, if it’s your first year in a new situation, you may not be aware of all of the deductions you could make.

Choosing How to Do Your Taxes

These issues I’ve outlined here are just starting points to consider; your tax situation may differ dramatically from every other web worker’s. If you have any concerns, it’s best to actually talk to a tax professional who you can tell about the specifics of your situation. It’s also worthwhile consulting the IRS web site for further information about your particular tax situation.

Do you use a tax professional?

Photo by Flickr user Alan Cleaver licensed under CC BY-ND 2.0

However, it isn’t all rainbows and unicorns. There are a number of downsides associated with freelancing, which is why I’ve made the decision to go back to a full-time corporate job as a community manager. I’ll still be a web worker, collaborating with people around the world online, but I’ll be doing it as a full-time employee.

Turning Hobbies Into Paying Gigs

When I began freelancing, I was excited that I could turn things that I was passionate about and doing for fun as hobbies into something that people would pay me to do. I could do fun work and earn money! This worked for me for quite a while, and maybe it continues to work for some people over long periods of time. For me, those things that I used to do for fun all became work, and they became less fun as they started to feel like work. I also realized that I really didn’t have hobbies anymore, and I was just spending all of my time working, which left me burned out, tired and grouchy.

Pressure

On a related note, I used to enjoy speaking at conferences, blogging and attending events when I used to do them mostly out of a passion for the topic, and because they were fun. As a freelancer, these became business development opportunities. I started feeling a big weight on my shoulders and pressure to speak or write only about topics that were directly related to my consulting practice so that I could use them to get more business. Attending events shifted from hanging out with my friends and meeting new people with interesting ideas to meeting people who might need my consulting services. All of these activities became less fun as a freelancer.

Logistics

Anyone who has ever freelanced full-time knows that the logistics can be complex, painful, time consuming and sometimes expensive. Taxes are much more complicated and time consuming even when you have an accountant do them for you because there are so many things you need to track. Independent health care plans are expensive and not nearly as good as when you get them through your employer. Retirement savings is also more difficult, and you can’t save nearly as much in an IRA as you can with a corporate 401k, especially since most employers match at least a portion of your contribution. I can be very detail-oriented when I need to be, so I was able to manage all of the logistics without any big issues, but it was just one more thing that I didn’t enjoy doing.

Could I have made changes in my working style to make all of this manageable and still be happy while maintaining my sanity at the same time? Maybe. For now, the best choice for me was to go back to working for a company. I’ll still continue blogging and playing with cool technologies, but I’ll go back to doing this evenings and weekends in the hope that they start to feel less like work and more like hobbies again. If not, I’ll just have to find some new hobbies. Bridge, anyone?

What is your least favorite part of freelancing, and how do you overcome the dark side of freelancing?

Photo by Flickr user weeta, licensed under CC BY 2.0.

For most freelancers, December is a slower month. Our clients are taking vacations and rarely does anyone schedule a big launch in December or January. This makes December an ideal time to get our finances in order, prepare for 2009 taxes and make any adjustments in our plans for 2010.

Everyone has a different approach to finances, taxes and planning, so rather than focus on how to do these things, I’m going to focus on questions that you should ask yourself.

• What am I missing? This is always a hard question because if you know the answer then it isn’t really missing, but it’s a critical question to ask. Look carefully at your expenses. Have you remembered to record all 12 instances of any monthly recurring expenses (hosting, online applications, phone, etc.)? What about those special cases, like home office deductions? Do you have any small income sources that haven’t been tracked (advertising, affiliates, book / white paper sales, etc.)? Can you get a head start on documenting any other tax materials? Cross-referencing with past tax forms and bank statements can help identify any missing income or expenses.
• Are my income and expenses relatively balanced? 2010 is way too late to make adjustments for 2009, so this is a critical question to look at in December while you still have time to make changes. Depending on the answer to this question, you might decide that you can afford to make a few extra business purchases (new equipment, books, etc.) or charitable contributions in 2009, or you might decide to defer some purchases to 2010. This is a great question to ask your accountant now.
• Where do I want to be in 2011 and beyond? Your answer to this question should include financial goals, career fulfillment, and personal life balance. Once you figure out where you want to be, you need to put together a plan with the steps to get you there. What additional training do you need? What expertise needs to be further developed and practiced? Are there some additional income streams that you want to pursue?

These three questions aren’t revolutionary or new, but they will hopefully serve as a nice reminder to use some of the December downtime to start thinking about wrapping up 2009 and preparing for 2010.

What other things do you do to wrap up the current year and prepare for the next?

Photo by Alan Cleaver used under Creative Commons.

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Traditionally, there’s a lot of paperwork that goes along with ending the year and getting ready to complete your income tax return. You might have to bring together information from several different applications, trying to make a mess of information make sense. WorkingPoint’s new features are meant to make use of all the work you’ve done over the course of the year to minimize the effort you have to do in getting ready to either hand your paperwork over to a tax preparer or to do your tax return yourself. While those features are still being rolled out, they should be in place by the end of the year.

If you’re already using WorkingPoint to manage invoices and expenses, you’ll be able to print out tax reports that directly map your business expenses to the IRS Form 1040 Schedule C (the form used to deduct business expenses), as well as calculate your estimated income taxes and print out 1099 forms for any independent contractors you’ve worked with over the course of the year. Other new features WorkingPoint plans on adding include integration with PayPal, banks and other e-commerce tools. The application also plans to add a payroll service gateway. It is important to note that the new features are only available with a premium account.

As a part of the improvements that WorkingPoint is rolling out, the application’s creators have added a second user to free accounts at no additional charge. While this may not seem immediately useful for some web workers — especially freelancers or anyone else working on their own — I’ve already found a good use for it. By giving my CPA access to my invoices and other business information, I can speed up the process of getting my taxes done as well as help my CPA to provide me with relevant advice about growing my business in 2010. With access to my account, he’s able to print off his own copies of tax reports, without any hassle of mailing them in. And since I don’t have to give out my own password for my account, my business’ data is a little safer.

The new developments at WorkingPoint serve to set this application apart from the other online invoicing tools, simply because few options provide easy ways to take all the business data you collect over the course of a year and turn it into an income tax return. WorkingPoint can save a lot of time when it comes to coordinating income, expenses and the various forms that go along with doing your taxes. If you use a tax preparer, you’ll find that you can get a faster turn around and if you do your taxes yourself, you’ll eliminate at least some of the stress.

If you’ve tried WorkingPoint, let us know how it worked out for you below.

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As we’re at the midyear point, now is a good time to evaluate how prepared you are for tax preparation, rather than wait for year end. To sweeten the deal a bit, the folks at Outright have partnered with Network Solutions to offer a free domain name and business profile page for one year to new signups. The promotion runs through until the end of July.

If you don’t already have a web presence, this might be a great way to get yourself online, and to get the bookkeeping and tax preparation benefits of Outright. Just register as normal with Outright and they’ll send you the details on how to get your domain name. It is estimated that 50 percent to 60 percent of small businesses do not yet have an online presence; offers like this can give people the ability to take the plunge and move their business to the web.

What I really like about this offer is that it is very much in the spirit of the Small Business Web movement that I think is tremendously important for the long-term success of web services. While not an integration move, it shows how service providers can work together to bring a real benefit to their small business users. I’ve watched these interactions and relationships develop online and am thrilled to see real benefits coming out of these partnerships.

Is your business online? Could you use a free domain name?

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While some Twitter desktop clients, like Tweetdeck, have this kind of functionality, Tweetgrid is interesting because it’s a web app; you don’t need to download anything or even need a Twitter login to use it. You can search for terms, hashtags and conversations and you can save your dashboard just by bookmarking the page.

Here’s a quick screencast showing what it can do:

WWD Screencast: TweetGrid from WebWorkerDaily on Vimeo.

What do you use for monitoring Twitter buzz?

(via DownloadSquad)

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While there’s no shortage of accounting programs available, with varying levels of complexity and pricing, it can be difficult for a small shop to find the right solution. Focusing on ease of use and integration with other web apps, Outright is a great choice for web workers.

In reality, the accounting needs of the average solo web worker are usually pretty modest. Record the money in (income) versus your money out (expenses) and be prepared to pay your taxes when they’re due.

At its core, Outright is a basic web service designed to allow you to easily track your expenses and income. Using a familiar check register interface, you enter in transaction details and get quick and simple access to the general health of your business.

As a member of the Small Business Web initiative I wrote about recently, Outright integrates well with FreshBooks, the invoicing app, and Shoeboxed, the receipt organizer (both also SBW members).

In fact, it is when used in conjunction with these other apps that Outright really stands out. While it has all the right things to make data entry easy, like auto-complete and keyboard shortcuts, nothing could be easier than having your existing invoice and expense data imported automatically. When connected to your Freshbooks or Shoeboxed accounts, all transactions are updated nightly and even maintain a link connection so you can get to the original source quickly.

There are some challenges with this integration, though. For example, Outright exclusively uses the categories from  Schedule C but since Shoeboxed doesn’t have that limitation, there are instances when it is necessary to manually re-assign a category to synced records.

I think the folks at Outright don’t stress enough the tax preparation angle when describing the usefulness of their service. With email reminders when quarterly payments are due, estimated payment amounts and a really handy Schedule C printout, using Outright just for the tax preparation functionality alone might make great sense.

If you’re already using Freshbooks or Shoeboxed, then getting an Outright account is almost a no-brainer. But even if you’re not using these apps, then Outright is still a very good choice for basic expense and income tracking.

oDesk integration was also recently added, and I imagine support for other apps is coming soon, so it might be a good idea to check in occasionally and see if they are supporting your app of choice.

Outright is free during the beta period and works wherever you have a browser and Internet connection.

How do you manage your books?

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