Hank: Hello America!
I am you.
Specifically, I'm your government, and I'm here to talk to you about my favourite day
of the year, April 15th.
Now some people may call this tax day, but I prefer to think of it as kind of a second
Halloween.
Every year, I go to each house in the nation, and collect tears- I mean, treats- I mean
money!
That will keep me alive for another year, so that we can have roads and schools and
defence and things.
There are some obvious differences between my Halloween and the so called "real one".
My version takes place in the Spring instead of the Autumn.
My costume doesn't change from year to year, though in fairness it's a pretty sweet costume.
But the biggest similarity of course, is that both days are associated with terror.
That, dear citizens, is where this video comes in.
In last weeks video, Mike Martin told you how people who work as employees for companies
go through the process of making sure that you don't give me too much or too little.
Or make me haunt you with an Audit.
But, if you are like many How to Adult viewers, you may also have freelance income.
That is what this second in our two-part tax series is all about.
What is a medicare tax?
As a freelancer do I have to pay it?
What exactly can I deduct?
What the eff is a deduction and who the eff is Hank?
Sorry, getting off topic.
Uncle Sam is disoriented.
I'll now be handing things over to Mike, one last note though.
We know that this video won't apply to our wonderful international viewers, so here is
a picture of Uncle Sam with Jennifer Lawrence.
I trust that will settle things.
Alright, thank you so much Uncle Sam....
Uncle Hank?
Uncle Shank!
Now we will be honest with you, taxes for freelancers are very complicated.
In this video, we have streamlined and simplified the process as much as we could without also
distorting it, but we do want to recommend that you invest in a tax professional to help
you through this process.
You can learn more about where to find these people by clicking here, which is our last
video.
Their services might cost a couple of hundred dollars, but an experienced professional can
easily save you that much and more through deductions you didn't know about and various
wizardry.
So, okay, having gotten that out of the way, this particular tour of tax wonderland will
focus on people who are self-employed and sole proprietors, who have not incorporated
yet.
This video will be divided into four parts: 1.
who is your freelancer, and what does he do?
2.
A pizza pockets detective for every season, 3.
A pizza pocket detective at year's end and 4.
In conclusion and review.
Now lets do that wonderlander thing again and begin at the beginning.
I was really hoping my Schwarzenegger would get better as this shoot went on, but no,
the other thing is happening.
So the first thing you have to ask yourself is "What is a self-employed?
What is a freelancer?
And am I one of them?"
In a nutshell, a self-employed person/sole proprietor/freelancer is anyone who sells
a product or service that is intended to be a profitable business, rather than a hobby.
Quiz time!
What's the difference between a business and a hobby?
With a business, essentially you have to have the intent to make a profit, and you have
to carry on your affairs in a businesslike manner.
This means books and records, invoices, separate bank accounts, etc.
Again, that's why we recommend that you meet with an accountant upfront, to make sure you
meet the requirements and get off to a good start.
Now you don't have to make a profit every year to be a business, but you do have to
have good records every year to be a business.
In fact, that is one of the most important tips we can offer in this video.
As a freelancer, your motto should be "DFTBO".
Don't forget to be organised.
Okay, so these records have to be good, but what do they actually have to be?
Well, lets find out in:
So, okay.
Lets say you are a detective employed at a detective company, but you also have a side-business
selling pizza pockets.
Now let me tell ya, these are some pretty tremendous delicacy's, so people are buying
in bulk, they're happy, you're happy, how do you make Uncle Shank happy?
There are a few things that you need to do throughout the year.
Throughout-The-Year-Thing-Number-One: Keep records of all income, but in particular,
if any one person or organisation pays you six hundred dollars or more in a single calendar
year, they are required to send you and the IRS a form called a 1099-MISC.
This is very important information, because Uncle Shank will be checking these MISC forms
against the gross receipts that you send him at the end of the year.
By the way, 'gross receipts' just means all the money you take in, it doesn't mean, like,
ones that have boogers on them.
I guess it could..
Similarly, if you, yourself, pay anyone else who is not a corporation six hundred dollars
in a calendar year, you have to send them a 1099-MISC, hopefully with the help of your
accountant.
Also, you have to send one to the IRS by January 31st of the following year.
Throughout-The-Year-Thing-Number-Two: Keep records of all your business-related expenses.
Now these business-related expenses could be obvious ones like mozzarella or your flour,
but they could also just as easily be more surprising ones.
For instance, a portion of your housing costs if you have an area in your home that is dedicated
just to your business.
So here's the bad news: little pepperoni's don't grow on trees, and it's costing you
money to make money.
Here is the good news: Uncle Shank is only interested in taking away your money once
you get into profit.
Definition time!
"Profit" is defined as your gross receipts (aka all the money that comes in the door)
minus all your business-related expenses (aka: all the money that goes out the door).
So anyway, for both your receipts and your expenses, you should set up a basic ledger
in a program like QuickBooks (link in the dooblydoo).
Once again, a professional can help you do this, or you can take a local or online class
on how to use the software.
Now we recommend that you post all your financial activity once a month at the end of the month
for best results.
Also, your accountant can advise you on the best ways to retain and record the original
source documents, aka the physical copies.
Throughout-The-Year-Thing-Number-Three: Prepare and pay quarterly estimated taxes.
If you think that your total tax liability for the calendar year will be more than one
thousand dollars, then you have to pay a quarterly tax to the IRS to avoid an underpayment penalty.
You'll need to do this by using what is called a form 1040-ES.
We know that it can be really confusing your first year in business to estimate how much
tax you'll owe, and that's another reason we suggest you work with an expert on your
specific situation.
Okay, so the year has come to a close, and that brings us to:
Once the new year begins, there are a few things you need to do.
Step One: Remember to send a form 1099-MISC to anyone who is not a corporation, that you
paid six hundred dollars or more to, and you have to do this by January 31st.
Step Two: Prepare your income tax return for your mini pizza empire.
To do this, you will use a form called a Schedule C. It shows your gross receipts and your expenses.
Basically, it's a profit and loss document.
Last week we talked about using a form 1040 to file your return, and the Schedule C will
actually be submitted as part of that 1040, when you do your taxes this year.
In other words, you don't have to file a separate return for your freelance income, which is
one of the major benefits of having a sole proprietorship, or a limited liability company
that did not incorporate.
Once again, the necessity or desire to form an LLC will be discussed in advance with your
tax accountant or advisor.
Okay, so, the Schedule C's profit or loss is reported on the front page of the form
1040, and it is included in your total income, including the income from the company where
you're a detective, and the income from your pocket of pizza's.
In other words, if you still work for the detective company, and for some weird reason,
your pizza pockets lose money one year, there is a silver lining.
The business loss will help offset or shelter some of your taxable income, which will mean
that you have to pay less to Uncle Shank that year.
'K, so you have prepared your income taxes, now we move on to Step Three: Prepare your
other self-employment taxes.
You may remember from our last video that if you work for a company, the company will
withhold income taxes from your wages, and they will also withhold social security and
medicare taxes from your wages throughout the year.
The social security and medicare taxes are then matched by your employer, so when you're
self-employed, you still have to pay those taxes, but, because there's not a company
to match them for you, you have to pay the full percent yourself.
This is called a retirement assessment, and it is totally separate from your income tax
obligations.
Now, these will be calculated based on the profit from your trusty Schedule C.
It's very much worth pausing here for a second to re-emphasise that that the self-employment
tax is in addition to the income tax that you owe.
So many self-employed people get a nasty surprise at the end of the year because of the self-employment
tax, so what I would like you to do is grab enough coffee to get you through the next
30 seconds or so, because I wanna do a little math.
So, to use an example, lets say you are single, and the only income you have is 10,000 dollars
in profit from self-employment.
When you're preparing your income tax return, you can use the standard deduction of 6,100
dollars, and the personal exemption of 3,900 dollars, these exemptions will total 10,000
dollars, which means that you don't have to pay income tax on the 10,000 dollars in profit.
BUT-BUT-BUT these exemptions do NOT apply to self-employment tax, so you will be paying
self-employment tax on the 10,000 dollars.
We know this can be very painful, but if it's any consolation, please remember that you
are putting this money into a retirement account, at the social security administration, and
as always remember to pay these taxes by April 15th.
So, here, in the most basic sense, is what you should do as a freelancer:
Hire a pro Keep good records of income and expenses throughout
the year, furnishing and receiving 1099-MISC forms when appropriate
Pay quarterly taxes for both self-employment and income taxes throughout the year, and
Prepare and pay any additional taxes due by April 15th
and you are done!
We hope that these videos have helped you in your adventures with Uncle Shank, as always
thank you for watching, and we will see you next week, with some non-tax videos.
Whew!