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Tax Year 2025 Updates for Freelance Workers

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There are two inevitables in human existence and one of them is taxes. The good news is that in many cases, one can prepare and develop a strategy to minimize the impact of the tax burden. The ability to devise a good strategy requires current information and that is the topic today.

You’re probably aware of Federal legislation known as the One, Big, Beautiful Bill. You may not know that parts of OBBB have been revised and proposed changes to federal tax Form 1099-K were tabled and guidelines from previous years have been restored.  

Officially titled the Payment Card and Third Party Network Transactions form,1099-K reports payments received from income generated by self-employed workers and paid to them by Third Party Settlement Organizations such as PayPal, Square, Stripe 2, or Venmo. Revenue received from transactions from online marketplaces, including Airbnb and eBay and also revenue derived from billable hours earned at Freelance B2B services platforms such as Fiverr and Upwork also trigger a 1099-K.

It’s important that Freelance professionals remain updated on federal and state tax legislation so that you can anticipate and prepare for your tax liability. If you’re able to choose your payment method—maybe you’re thinking of offering digital payment options for client invoices?—you would be wise to first assess the impact of that change to your finances. Giving clients additional payment options is now considered a competitive advantage and an aspect of customer service. But when you’d like to initiate payment flexibility, first discuss the matter with a tax accountant and let the tax filing implications, and also other financial advice, guide your invoice payment options.

Internal Revenue Service Form 1099-NEC

What will not change is IRS Form 1099-NEC (non-employee compensation). The form will be sent to self-employed workers, including Freelance professionals, other independent contractors and side-hustle specialists, who’ve been paid $600 or more in a given year. Your earnings most likely will not trigger a 1099-NEC if you billed the client less than under $600 in a calendar year, but you are still responsible for reporting all income whether or not you were sent a 1099-NEC. As a self-employed Freelance consultant, you are required to report self-employment income if your net earnings were $400 or more.

Internal Revenue Service Form 1099-K

As noted above, IRS Form 1099-K reports payments that Freelancers and other sellers of B2B or B2C goods and services received through Third Party Settlement Organizations such as PayPal, Square, Stripe 2, or Venmo for sales transactions between buyers and sellers have returned to the $20,000 billables and 200 transactions thresholds. Upwork and Fiverr will send 1099-K to Freelance workers whose billables equal or exceed $600 in a year, as noted above. Be advised that the proposed $2,500 (for 2025 earnings) and $600 (for 2026 earnings) thresholds are no longer in effect for 2025 and 2026.

As with 1099-NEC (and W-2), 1099-K statements must be sent to you, by email or hard copy, no later than January 31, 2026. If your clients pay you directly by credit, debit, or gift card, you’ll get a 1099-K from your payment card processor no matter how many payments you received or the total dollar amount of those payments.

Keep in mind that your state may have a lower reporting threshold for TPSOs, which could result in you receiving a Form 1099-K, even if your total gross payments and transactions did not exceed the federal $20,000 annual reporting threshold. Some states have their own rules for 1099-K reporting and your state threshold could be lower than the federal limit. While the IRS requires payment platforms to issue a 1099-K only if you have at least $20,000 in payments and 200 transactions for 2025, several states have set their reporting threshold at $600, regardless of the number of transactions.

Qualified Business Income (QBI) deduction

If your business entity is structured as a pass-through, you could be eligible for a 20% tax deduction by way of the IRS Section 199A Qualified Business Income (QBI) deduction. If you are an owner of a pass-through business entity, including S-corporations, Limited Liability Companies (LLC), Partnerships, including Limited Partnerships (LP) and Sole Proprietorships, can claim the QBI benefit whether or not they itemize deductions or take the standard deduction.

The QBI deduction allows eligible taxpayers to deduct up to 20 % of their QBI, plus 20 % of qualified real estate investment trust (REIT) dividends (not to be confused with income generated from rental property). Income earned through a C-corporation or W-2 wages are not eligible for the QBI Section 199A deduction. Eligible taxpayers can claim the deduction for tax years January 1, 2018 through December 31, 2025.

So who can do this? If taxable income (before the QBI deduction) is at or below the threshold amount—and thresholds are different for every year from 2018 – 2025, with the 2025 upper threshold at $197, 300 for single filing status and $394, 600 for married joint filing status—you’ll have access to the full deduction BUT the amount paid by an S-corp or a partnership that is treated as reasonable annual compensation for the taxpayer will not be eligible. To determine if your business may qualify for the QBI, click here to see this older, but useful, IRS form. Most of all, reach out to your tax accountant ASAP and verify your status.

Retirement Plan contribution deferral increase

Have you made a contribution to your retirement this year? If not, you have until December 31, 2025 to slide under the wire and save for your future. These retirement contributions come right off your income, lowering your tax bill and boosting your retirement financial readiness.

The Solo 401(k)—also known as the self-employed 401(k), individual 401(k), personal 401(k) or, to use the IRS’s preferred term, the one-participant 401—is known for its high contribution limits that enable Freelance consultants who have no employees for whom you provide benefits, to save for retirement. That includes Freelancers and gig workers who are Sole Proprietors, or structure their business entity as an LLC, S-corporations, C-corporations, or Partnership. If you have no employees, step right up to launch your preferred version of a single-person retirement fund.

  • In 2025, the maximum contribution is $23,500 (wearing your entity’s employee hat), plus an additional 25% of compensation (wearing your entity’s employer hat). You can also contribute an additional $7,500 in catch-up contributions if you are age 50-59 or age 64 or older. Those between age 60 and 63 may contribute an additional $11,250 in catch-up contributions if the plan allows.
  • In 2026, the maximum you can contribute is $24,500 as the entity employee plus an additional 25% of compensation as the entity employer, with additional catch-up contribution opportunities if you are 50 years or older.

If you file tax form Schedule C as a Sole Proprietor and have a SIMPLE IRA retirement plan, you are also treated as both employer and employee when calculating and reporting your plan contributions. Report both your salary reducing employee contributions and your employer contributions (non-elective or matching) for yourself on Part II – line 15 of Form 1040 Schedule 1, according to IRS info. You must deposit your salary reduction contributions within 30 days after the end of the tax year. For most people, this means salary reduction contributions for a given year must be made by January 30 of the following year. For most individuals, the annual contribution limit for a SIMPLE IRA is $16,500 in 2025 and $17,000 for 2026. Those who are age 50 years and older can also make an extra $3,500 catch-up contribution in 2025 and $4,000 for 2026 if their plan allows it. 

Self‑Employment Tax & Deductions

You already know that Freelance workers must file IRS Form SE no later than April 15, 2026 and pay 15.3% total (12.4% Social Security + 2.9% Medicare) on the net amount of your self‑employment income—because you must fund your own Social Security and Medicare benefits. The good news is that you can deduct half of the self‑employment tax (the “employer equivalent”) from your adjusted gross income.

  1. Social Security Cap: On the first $176,100 of combined wages + self‑employment income in 2025.
  2. Additional Medicare Tax:
  • 0.9% extra if income exceeds:
  • $200K (single/Head of Household),
  • $250K (married filing jointly),
  • $125K (married filing separately).
 Quarterly Estimated Taxes & Penalties

Because Freelancers file 1099-NEC and there is no withholding of earned income, you know that filing quarterly tax forms is a must-do if you expect to owe $1000 in federal tax, including self-employment tax; estimated tax payment must be paid with the quarterly filing. To avoid penalties, pay either 90% of 2025 tax or 100% of your 2024 earnings tax (or 110% of 2024 adjusted gross income if your earnings exceeded $150,000. Quarterly filing deadlines are April 15 (the annual filing), June 15, October 15 and January 15 (because 4Q earnings are reported in the new year).

In closing, I have a gift for those of you who will be 65 years old, or older, in 2025? if so, You’ll receive an extra $2,000 standard deduction (single filers) or $1,600 (joint filers).

Thanks for reading,

Kim

Image: The Tax Collector’s Office (1620-1640) Pieter Brueghel the Younger, courtesy of University of Southern California Fisher Museum of Art, Los Angeles

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2021 Financial Tune-up

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We’re at the top of the year, after closing out a particularly trying nine months of the previous. It seems that rough sailing will continue but we know what to expect now, more or less, and our experiences will enable us to brainstorm and identify strategies to help ride out the storm.

Whatever you’d like to achieve this year, money is likely to be necessary. In fact managing money may be the singular focus of your plan for the new year. For example, a practical goal for your business enterprise may be to conserve cash as a risk management strategy as the pandemic economy grinds on and on. Alternatively, saving money that will make it possible to take aim at your personal bucket list, which may include buying a home or trading up, or becoming more diligent about retirement savings, are or her motivators for managing and saving money.

Create a budget

The ultimate money-tracking and management tool is the budget. A budget accounts for anticipated revenue, which Freelancers are advised to conservatively estimate, and balances that amount against expenses that will be due, be they predetermined obligations such as rent or mortgage, transportation and groceries or discretionary expenses, such as new clothing purchases.

It’s also necessary to factor into your budget room for mundane expenses such as routine or emergency auto maintenance, technology needs and occasional home repairs and accessories, as well as allowances for fun expenses such as holiday and birthday gifts, occasional dinners out, or a weekend trip.

If one is both prudent and fortunate, revenue will exceed expenses most of the time and you’ll be able to save a few dollars every month. So budgeting should not be viewed as punishment; to the contrary, your budget is your friend. Why wouldn’t you want to know how much money you can expect to earn in a month or quarter and compare that amount to the typical expenses you expect to pay in that time period?

We all need to keep close tabs on cash-flow. The idea is to make money and avoid deficit spending. Budgets can be monthly, quarterly, or annual but a personal budget probably works best on a monthly cycle.

Get started by finding your 1099s and adding them up to identify the previous year’s gross revenue. Because 2020 was a year of diminished revenue for most Freelancers and we don’t know how much of a bounce forward 2021 will bring, income averaging 2019 and 2020 revenue could be a reasonable predictor of 2021. If you have dividend paying investments or interest bearing accounts that actually amount to something, be sure to include that income as well. Who knows, maybe you have a modest trust fund to include as well (it must be nice!).

Next, document 2020 expenses. Consult credit card statements, ATM withdrawals, mobile payment apps and checking account statements. Be honest with yourself about all the little ways that you spent money, from impulse purchases in the grocery store check-out line to chocolate therapy ice cream emergencies.

You will soon need to consider how to format your budget. Some will like an Excel spreadsheet and others will download a budgeting app such as what’s shown here. https://www.nerdwallet.com/blog/finance/budgeting-saving-tools/ I find The Balance website to be very helpful. https://www.thebalance.com/how-to-make-a-budget-1289587

Watch your caffeine

In life, so often it’s the little things that matter. Small expenses can easily add up to a bigger drain on your income than you realize. In other words, beware the $5.00 caffeine drinks. The most frugal option is to buy a good coffee maker or tea kettle + accessories and make your own brew. However, if stepping out for a break helps you to be a more effective work from home professional, find a local restaurant to visit. You may be able to save money as you have the pleasure of supporting a local business.

Monitor other expenditures as well. Not all of your small but life-enhancing pleasures will have to end, but making note of their impact on your finances may change your mind about a few things. If possible, maintain a couple of indulgences that mean the most and let the rest go.

Pay on time

Late fees for many bills are $25.00 or more and some companies consider them to be a line of business. You don’t want to go there. Late paying clients can force a Freelancer into that trap and I’ve been there. Help yourself by invoicing on time and finding the courage to send a gently worded reminder email to collect unpaid receivables that are approaching 60 days.

Moreover, when discussing a project with a client, ask for 20% – 25% of the total fee before you commence work. Tie subsequent payments to successfully completed project milestones. Avoid leaving more than 30% due at the project’s completion and therefore leaving yourself vulnerable to an unscrupulous operator who decides not to pay the full amount, now that s/he has want they want.

Finally, you may notice that planning to save money may inspire you, Freelancer Friend, to become more ambitious and disciplined about keeping your sales pipeline filled, enacting client retention strategies and even devising a campaign pitch to move regular clients to retainer agreements. When you make a commitment to yourself to manage money, you’ll want to be able to predict, and ideally increase, your revenue in order to achieve the savings target.

Thanks for reading,

Kim


			

	


				
					


			

						
							
						
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Keep it Going: Sustaining Your Success
		
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OMG you did it!! The months and years of working hard and working smart, of knowing when to listen to your inner voice and when to listen to a good adviser, the months of living on four hours of sleep and no vacations for what seems like forever and—–your company grossed $1 million over four consecutive quarters! You’ve reached a milestone that defines success.


OK. So now that you’ve reached the mountaintop, you have to figure out how to keep your footing and stay up there.  In fact, because you are focused, ambitious and determined, you’re already thinking about climbing even higher.  But sustaining and growing your success might demand as much work and determination as you invested to attain it. Here are four commonsense choices that can help you hold on to your earnings and continue the positive slope of your company’s future.


Pay taxes


Meet with a business accountant and figure out how much money you should reserve each quarter for tax payments (usually 30% – 40%). You don’t want to wait until the annual tax time and realize that you owe big money to the IRS.  Before you spread money around, pay the quarterly tax bill and set aside enough to ensure that all remaining tax bills in the calendar year can be covered.


Smart celebration


When you hit the revenue milestone that you’ve defined as your “made it” metric, whether the amount is a net or gross figure, you owe it to yourself to celebrate. What’s important, though, is not only how you celebrate but also with whom.


First, don’t overspend.  If you want to take a week-long spa vacation then go for it, because that will dissolve your stress and prepare you for the work you’ll do to build on your new-found success.  Or maybe you’d like to visit a place you’ve always wanted to see, or return to?  A splurge that refreshes and replenishes your energy stores is likewise always worth it.


Where you want to be careful is the amount you spend on consumer goods.  You may need a new car and if you can afford it, then do so, but be careful about splurging on luxuries.  Buying a Saab or Volvo probably makes more sense than buying a BMW or Benz at this point.  Save real luxury purchases for when you’ve raised your net worth to a more substantial level.


Others may want to throw a party.  Caution is advised when developing the guest list.  The sad fact is that there will be certain individuals, including family members, who will feel more envy than happiness upon hearing news of your success.  If a party is a must-do (and why not?), invite only those who supported and believed in you.


Fair-weather friends, frenemies, passive-aggressives, or critical types who claim that they’re just playing “devil’s advocate” or being “objective” are mostly about undermining and sabotaging. They are not your friends, even if they’re family members.  Don’t invite them and don’t let your mother guilt you into including them.  They don’t belong.


Save money


After you’ve paid down or, ideally, paid off any significant debts, business and personal, it’s time to save money.  Start with your retirement fund. Research options available to you in accordance with the business you own and pay the maximum amount allowed by your age and income level.  Investigate opening a Roth retirement account as a place to hold after-tax money if you anticipate having surplus cash.


Once you’ve figured out your retirement fund strategy, focus on other long-term investments. By all means, invest in the equipment, staffing, technology and office or manufacturing space that will support operations (including customer service), generate ROI and advance the business. But what if the building where you lease space comes up for sale? It might be a good move to buy the building, so that you can control your costs more effectively and also collect some rents.  For that, you’ll need money and a good credit score.


You can give yourself a wish-list savings account to build up cash reserves. There are other investments that can be made as well and to learn about your options, ask people you trust to recommend an investment counselor.  If you’ve got even $5000 to invest, investigate certificates of deposit, online banks such as Everbank, index stock funds, or actively managed mutual funds.


Keep doing what it was that made you successful


Now that you have a blueprint for making lots of money, continue to follow the template and don’t slack off! Don’t think that once you reach a certain level of success that things will just cruise along on their own. You must continue to do those things that created the conditions for success.  You can, however, devise methods that help processes become more efficient—that comes from experience. Operational efficiencies make money.  Plan your work to give priority to income-generating activities, such as sales calls and networking, to conserve your energy and bolster your stamina and creativity.


Thanks for reading,


Kim


Image: Emanuel Leutze (1816 – 1868, Germany) Washington Crossing the Delaware (River) December 25- 26, 1776 (1851)		


			

	


				
					


			

						
							
						
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Dates to Keep You Straight
		
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Every year, Freelancers have an important list of dates to remember and act on, primarily those related to tax filings, retirement account management and health insurance plan enrollment. To help you stay organized, I’ve compiled this date planner that brings together all deadlines into one document that you can bookmark, copy into your calendar or even print out and post on your refrigerator.


TAXES


January 31, 2019: 1099-MISC due to contractors

Those who hired Freelancers (independent contractors) to whom they paid $600 or more in the previous year must send 1099-MISC forms by January 31, 2019.  If a client paid you less than $600, then you probably will not be mailed a 1099-MISC, although the IRS nevertheless requires you to report all income.


Do keep scrupulous records of who owes you a 1099-MISC so that you can accurately report your income on your tax return.  Your clients will also send 1099-MISC data re: you to the IRS and any differences between your numbers and the clients’ could trigger an audit.  If you haven’t received a 1099-MISC from a client by January 31, contact your client ASAP and request a re-send.


If you used any subcontractors to whom you paid at least $600 last year, you must likewise send them a 1099-MISC by January 31.


April 15, 2019: Individual income tax filing deadline

You have until April 15, 2019 to file your Form 1040 individual income tax return for 2018. Be aware that April 15 isn’t the deadline to pay your taxes — tax payments for Freelancers are due on a quarterly schedule (see 2019 quarterly estimated tax deadlines, below). If you wait until the tax filing deadline to pay your taxes, the IRS may charge you penalties and interest on top of the tax you owe.


If you’re still waiting for information, or you’re too busy to file a return by April 15, you may apply for a six-month extension that gives you until October 15, 2019 to file. The extension application needs to be filed by April 15, 2019. Remember again that the extension is for filing, not paying your taxes.  Payments are still due on the quarterly schedule no matter when you file and penalties and interest can accumulate if you wait to pay.


QUARTERLY TAX FILING DATES


The IRS requires business owners to pay income taxes on a quarterly schedule. This may seem like a hassle, but it’s easier to pay in four installments than to try and come up with a whole year’s worth of income taxes all at once.


Here are the 2019 deadlines for quarterly estimated tax payments. Note that the four quarters are not of equal lengths: the 2nd Quarter covers only April and May, while the 4th Quarter covers the last four months of the year.


DEADLINE                                                         PERIOD COVERED


April 15, 2019                                                     January 1 – March 31, 2019


June 17, 2019                                                      April 1 – May 31, 2019


September 16, 2019                                           June 1 – August 31, 2019


January 15, 2020                                                September 1 – December 31, 2019


 


RETIREMENT ACCOUNTS


April 15, 2019: Deadline to set up and contribute to an IRA for 2018

Even if you made no contributions to your retirement savings account in 2018, you can still make a 2018 contribution to an IRA up until April 15, 2019. This includes traditional, Roth and SEP IRAs. You can also make 2019 contributions to these plans from now up until next year’s tax filing deadline of April 15, 2020.


December 31, 2019: Deadline to set up an individual 401(K) 

An individual 401(K) is another type of plan that Freelancers can use to save for retirement. One important detail is that an individual 401(K) must be established by December 31st of the first plan year (as opposed to an IRA, which can be opened up until April 15 of the following year). That means it’s too late to set up an individual 401(K) for 2018, but you may set one up for 2019.


Contribution limits 2019 update:


Solo 401(K)                                                                                                                            Employer: 20% of net self-employment income                                                            Employee: 100 % of earned income up to $19,000 (for age 50 years +, up to $25,000)   Total combined contribution: $56,000


Traditional or Roth 401(K)                                                                                                     $6000 annually $7000 if age 50 years +


SEP IRA                                                                                                                                               The lesser of 20% of net self-employment income, or $56,000 annually


 


HEALTH INSURANCE


The open enrollment dates to purchase health insurance for 2020 on the Affordable Care Act exchange will be November 1 – December 15, 2019.  Open enrollment for 2020 through the national health insurance exchange will also be run from November 1 – December 15, 2019.


 


Thanks for reading,


Kim


 


 		


			

	


				
					


			

						
							
						
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Budget Plan: The Unexpected Windfall
		
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Now check this out—what if Santa Claus comes to town and leaves a nice financial windfall under your Christmas tree? What a sweet surprise! You took a chance and competed for a very lucrative assignment and by some miracle, you won.  Along with making sure that you’ll deliver, if not surpass, your new client’s expectations, you should as well think about how you can most effectively utilize the proceeds from the billable hours.


Most often, we approach the subject of financial contingency planning from the negative side and prepare ourselves for unexpected expenses that could ruin a budget or seriously deplete our savings.  But why not manifest prosperity and think about what you can do if your ship comes in? Here’s a sampling of where extra money can be applied:


Erase debt.  Without a doubt, pay down and pay off all outstanding debts.  Interest rates are at loan sharking level and eliminating the burden will increase your credit score and decrease your stress level.  If you are not in debt, then pay ahead monthly installment obligations such as health and auto insurance policies or renewable business licenses and certifications.  Payment of these types of accounts payable is recorded as an asset on your Balance Sheet.


Professional development.  Are there continuing education workshops and courses or certifications that if acquired stand to enhance your stature and brand? Is there a conference that not only provides good business information, but also excellent networking opportunities? Explore how you might be able to raise the bar on your qualifications and make yourself a more employable Freelance consultant.


Business investment.  Maybe your billable hours are sufficiently generous to allow you to buy a new car? Ask your accountant or business attorney if the proposed new automobile can be designated as a company vehicle and permit you to write off some portion of the expenses plus depreciation, so that you could sweeten the investment.  You might also consider computer or other technology upgrades, or office equipment such as a new desk or an ergonomically correct office chair.  Much smaller but still significant branding upgrades include personalized business note cards, holiday greeting cards, stationery and your invoice statement.


Retirement account.  Fund your retirement account to the maximum annual amount with pre-tax dollars.  If you have extra money, open a Roth IRA account in tandem with your primary retirement account and enhance your financial future with after-tax dollars. Verify first the financial guidelines required for simultaneously holding these two retirement funds.


General savings. You might also meet with a wealth manager, if you meet the investment minimum and can find someone who can be trusted.  Alternatively,  on your own you can research and invest a couple of thousand dollars in a mutual fund that is indexed to the stock market and watch it grow (and it will, despite some ups and downs along the way).


Splurge.  Oh, go ahead! When’s the last time you took a wonderful vacation? Freelancers work so hard and we worry so much about how we will be able to satisfy our clients, find new clients, win back lapsed clients, generate relevant content marketing, distinguish ourselves from our many competitors and on and on.  I don’t know about all of you, but I am so exhausted it’s absurd.  I’ve been able to take brief local vacations, but I dream of taking two weeks or even more in Marrakesh, Morocco. Or Bahia, Brazil. Or Shanghai. Or Rome. Or Tokyo. Or Buenos Aires. Mmmmm….!


Thanks for reading,


Kim

			

	


				
					


			

						
							
						
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Exit Strategy: The Retirement Plan
		
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According to the Bureau of Labor Statistics, 15 million Americans were self-employed in 2015. That’s 15 million talented, ambitious, disciplined and self-confident citizens of our nation who’ve taken charge of their professional and financial future and they (we!) are to be congratulated.  According to the Bureau, self-employed business owners and Freelancers represent 10.1% of the population and they are surely the Talented Tenth.


Now for the bad news—self-employed professionals are not eligible for employer-sponsored benefits of any kind, unless they employ full-time workers and are therefore compelled to provide certain benefits that they would also receive.   Otherwise, the 15 million self-employed do not receive paid sick time, holiday time, vacation time, or employer cosponsored health insurance or retirement benefits.  In addition to the self-employed, there are many more millions who work in traditional employment on a part-time basis only, making them unable to receive employer-sponsored worker’s benefits.  Income inequality, anyone?


Let us consider the retirement fund matter, one of the two benefits issues that workers are able to self-fund (health insurance is the other).  If your finances allow you to set aside money that will be used to support you when you’re too old to work,  you will be wise to do so ASAP.


Examine your spending patterns.  How much are you spending on items that you want, but don’t need?  I don’t recommend that you deny yourself all gratification—we all deserve little luxuries every now and again—but some activities and purchases might perhaps be scaled back, allowing those funds to be redirected to prudent investments.


Budgeting a limited income is stress-producing.  Even those who work full-time may be forced to under-fund their retirement accounts, despite the employer matching contributions.  Wages have stagnated for 30 years and living expenses have done nothing but increase.  As a result, many of us are unable to save enough money.  Many elect to utilize money they’ve managed to save for a down payment on a house, rather than saving for retirement.  Financing one’s life 20 or more years from now must take a back seat.


According to the Government Accountability Office,  in 2015, approximately 50% of Americans had no retirement account whatsoever and 29% of those age 55 and older had neither retirement savings nor a pension.  Social Security is not a good fall-back option. The average monthly pay-out to retirees is only about $1294.  For the overwhelming majority, that’s not enough to carry one through more than half a month.


I consider the retirement picture in the U.S. as both a looming national emergency and a national embarrassment.  Corporate governance laws enacted during the administrations of Ronald Reagan, Bill Clinton and George Bush (son) that brought us globalization and the transfer of good paying jobs to other countries, in the process destroying for all time the ability of so many American citizens to earn a comfortable living employed in benefits paying full-time jobs, is the primary reason for this crisis.


The computer age has done the world no favors, either.  So now you can play with Snapchat on your Android while on break at your $12/hour job.  Yes, there have been magnificent technological advances that have helped in many fields, medicine comes to mind.  But are those benefits worth the livelihood of millions?  That’s a good question for the ethicists.


If at all possible, please start a retirement account.  Here are two options for Freelancers and those who work part-time at one or more locations:


myRA is a starter retirement account created by the Department of the Treasury. There are no fees associated with opening a myRA account and you can decide how much you’d like to contribute each month, according to your budget. Automatic withdrawal contributions can be set up through your bank account or paycheck.


If you change jobs, the myRA account is not affected. If you must take money from the account, there is no financial penalty to pay and no additional taxes are taken out. Like a Roth IRA account, myRA is funded with after-tax income. The maximum annual myRA contribution is $5500 and $6500 for those age 50 or older. The maximum amount that can be held in a myRA is $15,000.  Once the $15,000 limit has been reached (or before, for that matter),  the balance can be rolled over into a traditional retirement account.  https://myra.gov


Self-employed 401(k) profit sharing-plan (Solo 401 [k]) is funded with pre-tax dollars.  You can make contributions as both an employer (because you employ yourself) and as an employee (because you are employed by your sole proprietorship or single person LLC entity). Wearing your employer hat,  one contribution can be up to 25% of annual net profit, or $33,000 ($39,000 if 50 years or older) per year .  A second contribution of maximum $18,000 annually ($24,000 annually for those 50 years and older) can be made while wearing your employee hat.


Better still,  it’s possible to hire your spouse as an employee under this plan and s/he can contribute in the same way as you do,  meaning that your spouse can also contribute up to $53,000 ($59,000 if age 50 years or older) per year .  Open your Solo 401(k) account before December 31 if you’d like to make a tax-deductible contribution this year.


Thanks for reading,


Kim


 


 


 

			

	


				
					


			

						
							
						
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Year-End Tax Planning: Freelancer Options
		
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It’s never too early to start a retirement plan and Freelance consultants are encouraged to set aside money whenever possible.  Be advised that contributions to a self-funded retirement plan are guided by your net earnings from self-employment.  If you net $80,000 this year,  then you may contribute 20%  of that amount,  or $16,000,  to a SEP IRA or Solo 401K plan.  If you are age 50 +,  a  “catch-up”  contribution of maximum $5,500  (in 2014)  can raise your total allowed retirement fund contribution  (and tax deduction)  to $21, 500.  The maximum amount that one can contribute in tax year 2014 is $52,000 and $57,500 for those age 50 +.  However,  if you are a high earner and you consult with a savvy tax specialist,  it may be possible to divert lots more tax-deductible dollars to a Solo 401K than is allowed with a SEP IRA.


 


SIMPLE IRA


The Savings Incentive Match Plan for Employees Individual Retirement Account is a type of traditional IRA that is tailored for small business owners and self-employed Freelance consultants.  As with a traditional IRA,  contributions are tax-deductible and savings held in the account are tax-deferred until retirement withdrawals are made  (age 59 1/2 the youngest and age 70 1/2 the oldest).  If you have employees,  they may contribute to the SIMPLE IRA themselves and you the employer are required to make annual contributions as well,  whether or not the employee chooses to contribute.  You may make a 100%  match of the employee’s contribution,  but the maximum is 3% of your  net earnings,  or you may limit your employer contribution to 2%  of your  net earnings.


Any business entity that employs 100 or fewer workers may establish a SIMPLE IRA for employees and the owners,  too.  If you anticipate growth in your business that will likely cause you to hire even one full-time employee,  then consider a SIMPLE IRA,  because adding employees to the plan is relatively easy,  unlike other retirement plans.  The big downsides to SIMPLE IRA are 1).  the $12,000 annual contribution limit is considerably lower than that of SEP IRA and Solo 401K and 2). the  $2,5000  “catch-up contribution”  for Freelancers and business owners who are age 50 + is paltry by comparison as well.


However,  as a business owner or self-employed Freelance consultant,  you are your own employer and you may contribute to your SIMPLE IRA as both employer and employee.  You may add in up to 3% of net earnings,  in this example up to $2,400,  to contribute $14,4000 in 2014 and $2,500 extra if you are age 50 +.  Finally,  if you don’t make much money but you still want to set aside a little something for retirement,  if your net earnings from self-employment are $12,000 or less,  you may contribute 100% of the amount of your net earnings to your SIMPLE IRA.


ROTH 401K


A designated Roth Retirement Account is an individual retirement account that exists under the umbrella of your 401K,  solo or traditional  (if the 401K is set up to allow it).  Unlike SEP and Solo 401K,  Roth 401K contributions are made with after-tax income and when you are ready to access the account,  you will draw down tax-free money.   The 2014 maximum Roth 401K contribution is $5,500  ($6,500 for those age 50 +).


Your selection of a Roth designation within your 401K will depend upon your financial circumstances and you should meet with a reliable financial adviser in advance.  An individual or couple might choose a Roth when there are insufficient deductions to itemize at tax time,  thus negating the tax deduction benefit of the other retirement accounts .  The Roth,  paid with after-tax dollars,  gives account holders the benefit of tax-free income during retirement.   Wealthy Freelance consultants who are concerned about minimizing taxes during retirement may also benefit from the Roth.


You may have both a  (pre-tax)  Solo 401K and an  (after tax)  Roth 401K and it is permissible to use the salary-deferred portion of your Solo 401K to make a Roth 401K contribution.  Profit sharing Solo 401K contributions are not eligible to be made as a Roth 401K contribution,  since they are made pre-tax and are tax deductible and you cannot commingle the two.


While Roth 401K income-deferred contributions are NOT tax-deductible,  withdrawals made after age 59 1/2 are tax-free IF five years have passed since your first contribution to the Roth  (known as the 5 year rule).  One is NOT required to take distributions at least by age 70 1/2 and that feature may be useful for retirement cash flow planning.


Thanks for reading,


Kim

			

	


				
					


			

						
							
						
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Year-End Tax Planning: Funding Your Retirement
		
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Happy November.  The year will soon end and it is time to put together a tax planning strategy while there is still time to plan and execute.  There may be business equipment to purchase,  upgrades to make to your website or a seminar to attend,  but we self-employed workers must also fund our retirement.  Traditionally employed workers must also fund their retirement,  but they get help from their employers.  Freelancers are our own employers and we must step up and do all that we can to stash a few tax-deductible dollars in the cookie jar,  so that we can eat when we’re 75.


Whether you’ll squeeze a few thousand dollars out of modest billable hours or you’re looking for a place to roll the overflow from a lucrative year,  saving for retirement is a superb tax planning strategy.  It is also a superb life planning strategy.  Under no circumstances do we want to be old and broke in America.  If one is single,  that is a real possibility.  This is not Europe and the government will not give us any financial assistance in a time of need,  even though we have been tax paying citizens our entire lives.


The good news is that there are good retirement plan options available to Freelancers with a few thousand dollars to spare and the discipline to save.  Also,  the retirement money can be invested in stocks,  bonds,  mutual funds or even real estate.  You might get lucky and see your investment really grow.  Taxes will not be paid until it’s time to draw down on the account  (age 59 1/2 the youngest and age 70 1/2 the oldest).


SEP IRA


The Simplified Employee Pension Individual Retirement Account is modeled after the IRAs that every employer offers.  They are evidently the easiest type of retirement account to set up and there are minimal IRS reporting requirements involved.  Your job will be to find a brokerage firm that will set up the plan,  process your deposits,  maybe give you some investment advice and not kill you with administration fees.


Contributions are limited to 20% of your net earnings  (before the self-employment tax).  Contributions are capped at $52,000/year for tax year 2014 and the limit will increase every year or two,  to adjust for inflation.  A married couple who run a business together,  or are each Freelancers,  may open a joint account and save an annual maximum of $98,000 tax-deductible retirement dollars in 2014.  One cannot borrow against a SEP IRA.


SOLO 401K


The Individual 401K is modeled after a traditional 401K and once again,  the IRS filing requirements are uncomplicated and your job is to find a brokerage firm that will set up the plan,  process your deposits and not kill you with administration fees.  One may contribute money a little differently to a Solo 401K,  in that you may give yourself a  “salary deferral”  in a good year and stash up to 20% of your net earnings into the Solo 401K,  but the annual maximum contribution remains $52,000 in 2014  (the limit will rise modestly to adjust for inflation).  However,  Freelancers aged 50 +  can take advantage of the  $5,500 (max)  “catch-up contribution”  feature,  which allows those who are able to set aside more retirement dollars to do so and contribute up to $57,500/year in tax-deductible dollars.  Another big advantage of the Solo 401 K is that one may borrow against maximum one-half of the assets  (you must repay the loan with interest, to yourself).  Additionally,  a married couple who run a business together can start a Solo 401K retirement plan for the two and contribute up to $98,000 annually as of 2014 and $10,000 more with the catch-up contribution if both are age 50 +.


Next week,   we’ll look at the SIMPLE IRA and more retirement plan options.


Thanks for reading,


Kim

			

	


				
					


			

						
							
						
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Year End Tax Planning 2013
		
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Lo and behold it is the first week of November and time for you to begin your year-end tax planning.  If you have an accountant or bookkeeper,  pick up the phone and make an appointment.   If you perform these functions yourself,  then take action now,  before Thanksgiving and Christmas ambush you.  Your mission is to minimize the tax bill payable in April 2014.


Let’s start with your place of business.  Do you work from home?  Then consider taking the home office deduction.


Next,  take a look at revenue generated in 2013.  If this was a lucrative year,  you are advised to push income into 2014,  especially if you expect next year to be less flush.   Study the matter before you invoice late 4th quarter projects.  Call clients to confirm that it will be OK to invoice in January.  Many are not on a January – December fiscal year,  so deferring payment until January may not be a problem.


If you expect no substantive change in revenue generated from 2013 to 2014,  consider investing in your business and creating additional tax write-offs this year,  rather than next.  Remember also  to make a contribution to your Solo 401K,  IRA or Roth retirement account.  Freelancers who have already celebrated their 50th birthday are eligible to make a maximum $22,000 tax-deferred catch-up contribution to their Solo 401K each year,  on money generated from self-employment only.


Further,  those who’ve had a good year and hold a Solo 401K may deposit up to 25% of their income into the account.  The tax-deductible and tax-deferred income limit is $49,000 for those under 50 years and $54,500 for those aged 50 years and older.  See my post https://freelancetheconsultantsdiary.wordpress.com/2010/11/09/the-self-employed-401k-plan/  for more information.


The Affordable Healthcare Act must now be factored into your year-end tax strategy.  Freelance soloprenuers who qualify for a health insurance subsidy (approximate income maximums of $45,000 for a single person household and $94,000 for a family of four)  need not worry about the subsidy being treated as taxable income.  However,  if your insurer refunds to you a portion of premiums paid,  that refund will be taxable and a 1099 will be sent.


Healthcare Act subsidies function to limit out-of-pocket  monthly insurance premium costs for those who generate revenues below a certain threshold.  The subsidy may be requested as follows:


1. Premium assistance credits, to reduce the monthly cost of health insurance


2. Up-front lump-sum payment


3. Tax credit on Form 1040, to reduce any taxes owed and perhaps create a refund


A statement that documents any subsidy will be issued and there will be an annual reconciliation.  If you underestimated your 2014 income,  you will be required to pay back a portion of your subsidy.  If 2014 income was overestimated,  then a refund will be somehow issued.  Visit the website of either your state or federal health insurance exchange to obtain information about how to estimate your 2014 income.


YOU will be responsible for monitoring your annual income and ensuring that you receive the correct subsidy.  Ben Tallman of Tallman Tax Service in Atlanta recommends that Freelancers monitor revenues and expenses at least quarterly and contact their health exchange and get themselves re-certified in the event of a large increase in income generated,  to reduce the chance of facing a subsidy claw-back at tax time.


Thanks for reading,


Kim		


			

	


				
					


			

						
							
						
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The Roth, The SEP and The Solo 
		
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As you begin to ponder your inevitable retirement from the Freelance life,  you’ll  need to examine options for saving.  Those who generate an income large enough to make planning and saving for the future an obvious course of action probably have an investment counselor to act as guide through the minefield.  


Yet at some point,  less wealthy Freelancers must also understand how to finance the next phase of their lives.  Choosing the best retirement plan option is confusing and subtle differences can magnify both at tax time and when it’s time to retire.  I hope that you find this post useful as you formulate the plan for your future.


The Simplified Employer Pension Plan


Somewhat similar to Solo 401K,  the SEP IRA retirement plan may be used by Sole Proprietors,  LLCs,   C  Corporations,  S  Corporations and Partnerships.  As an added bonus,  the SEP IRA may be used not only by those who have both W2 and self employment income,  but also by business owners who employ more than just the spouse.


Contributions to the SEP IRA are made pre-tax and contributions are tax deductible.  It is permissible to contribute up to 25 %  of W2 earnings plus up to 20%  of self employment income,  to the maximum annual contribution of $49,000.00 in 2010.  There is no  “catch up contribution”  provision with SEP IRA.


If you have a job,  including one where you are able to participate in a retirement plan,  along with a sideline business,  then SEP IRA is your option of choice.   Up to the maximum,  the amount you choose to contribute,  or even if you choose to contribute,  in a given year is up to you.  Contributions are held tax deferred and withdrawals made after age 59 1/2 are taxed as ordinary income.  Withdrawals made prior to age 59 1/2 are subject to the customary 10 %  premature withdrawal penalty and additionally,  will be taxed as ordinary income.


Small business owners with employees may institute a SEP IRA for themselves and their employees.  Business owners are able to make generous tax deductible contributions to the company SEP IRA on behalf of themselves,  the on-the-payroll-wage-earning spouse and other employees.


The business owner decides at what level to fund the plan,  up to 25%  of annual compensation.  The %  of funding for the business owner must equal what is offered to employees.  Each employee has an individual SEP IRA account and the business owner pays the entire contribution.  The pre-tax money paid into each SEP IRA account is tax deductible for the business and is a tax free benefit for the employee.


If you like,  it is possible to convert a SEP IRA to a Solo 401K,  something you may choose to do when you turn 50 and want to make those catch up contributions.  Other retirement accounts can be consolidated into the SEP IRA,  with the exception of a Roth  401K,  which is an after-tax fund.  It is not possible to borrow against the value of the SEP IRA.  April 15  is the deadline to establish and fund your SEP IRA account in order to receive a tax deduction for the previous year.


Roth 401K


 Unlike SEP and Solo 401K,   Roth 401K contributions are made with after-tax income.  Which option you choose will,  like most of life’s choices,  depend upon how much money you generate.  Depending upon your financial situation,  you may decide to split the difference and have both a  (pre-tax)  Solo 401K and an  (after tax)  Roth 401K. 


It is permissible to use the salary deferred portion of your Solo 401K to make a Roth 401K contribution.   Remember that the maximum annual contribution is $16,500.00  for those younger than 50 years and $22,000.00 for those 50 years and older.  Profit sharing Solo 401K contributions are not eligible to be made as a Roth 401K contribution,  since they are made pre-tax and are tax deductible and you cannot commingle the two.


While Roth 401K income deferred contributions are NOT tax deductible,  withdrawals you make after age 59 1/2 years are tax free IF five years have passed since your first contribution to the Roth (known as the 5 year rule).  Roth distributions must begin at least by age 70 1/2,  unless you roll over to the Roth IRA.


BTW,  if you transition into a job that offers a retirement plan,  you may be tempted to roll your SEP IRA or Solo 401K into the new retirement account.  Be advised that may or may not be a smart move.  Maintenance fees will be much lower for an account attached to a large company vs. that of an individual;  but there is much more investment flexibility available in your Solo 401K vs. what is available to a big corporation. 


Thanks for reading,


Kim