The most valuable tax information I know of can be found here.

My wife purchased the eight cassette kit w/workbook as well as the tax journal. I have listened to all the tapes. The information given is very easy to understand and extremely valuable. Sandy is entertaining to listen to so I was able to stay interested. Everything is covered from writing off vacations to discussing the different types of business models (sole proprietorship, LLC, etc.) in relation to their tax pros and cons.

I was a freelance web designer for the majority of last year, but I also had some other income. So I took my info to H&R block, expecting to pay a good $600 in taxes this year. I only ended up paying about $90 in taxes thanks to their hard work - but I did have to pay them about $250 for it. In the end, I ended up paying less than I had planned to pay, so I was happy.

So my advice is this - save up money during the year to pay your taxes, and then have someone else do them for you.

Sort your receipts as they come into your expense file. Build up a moderate savings account so you're prepared to pay (if you have/want to). Know you're escape plan in case the IRS knock at your door. Use Excel. If you believe you're in for a refund based on a loss, then pay somebody else to do your tax prep. Don't drink while you're doing you're own tax prep. It's okay to weep like a baby when you sign your check for $2,612 made payable to the IRS. Smile when it's all over. Think about finding a full-time job instead of being a contractor.

hire a tax accountant. if possible one that knows our industry. remember: the more taxes you pay -- the more money you made. so be happy about it.

Be smart. If you are freelancing, which means you are being paid without anybody withholding taxes, then put about 40-50% of your income aside as you receive it into a separate account and don't touch it until tax time. The last thing you want to do is have to raid an IRA or borrow money to pay the taxman. And, if you're lucky, you might have some money left over to go buy that new G5.

FYI, freelancers are supposed to pay estimated taxes during the year. If you don't, the gov't charges you a penalty (not a very large one), because, technically, you are supposed to pay all your taxes during the calendar year (i.e. before Dec. 31). I paid the penalty for 2003, but I'm paying estimates this year to avoid it.

Unless you are a financial whiz, I advocate hiring a tax pro to prepare your forms. They will charge several hundred dollars (I paid my guy $350 this year) but that's numerous hours that you can spend designing instead of filling out forms.

I would like to know more tax tips on the CANADIAN side of design business. Especially about pro-bono and donated services, which I believe can be tax deducted, unlike the United States.

I work full-time as an in-house while I freelance on the side, so I got myself a tax accountant to do my taxes. In the end, he got me about $250 more than my initial, feeble attempt at figuring out my own taxes. His fee was $100 so I made $150 more just by getting my taxes done by a professional. Huzzah!

Last year I did my taxes myself for the first time -- ended up paying over $3K. This year I had a CPA do it and got back over $3K. Words of advice -- keep every little receipt for anything related to your business or freelance business. You may think it too small but keep it anyway. And have a professional do your taxes.

Thanks a lot for this post... I needed it

"Last year I did my taxes myself for the first time -- ended up paying over $3K."

You may be able to recoup some of your money by having your accountant file an ammended tax return.

Hire an accountant that understands graphic design also. So if you deduct a new Xyron machine or something design-specific, they'll be familiar with it. In Seattle, there's a firm that specializes in small/medium agencies, reps, artists, and contractors. If any of you Seattle folks are interested in the lead, just email me.

I spend about $300 a year for a joint housefold filing -- and in return, my accountant saves me thousands in time and deductions.

One more simple tax tip. My wife used to be pretty bad about holding back enough for her freelance work. So to compensate, I claimed zero deductions, and at times, even added additional withholding ($50-100 per paycheck) on my W-2. It saved our asses some years. And in years when we owed less, the extra withholding surplus became a vacation fund.

Good advice, Jon. I did the same when I was freelancing except I only put aside 33% and this worked out just about right. I also opted to pay the penalty instead of quarterly estimated tax, mainly because the time it took to do the quarterly paperwork is more costly than the penalty. Theoretically, the interest you make on having that 33% in your own bank account instead of the government's over the course of a year would contribute to offsetting the penalty. In my case we're not talking about enough money for interest to be all that significant, back when I were a little ol student.

I found it very helpful to understand the principle of what's deductible. (Disclaimer: I have no financial education other than several conversations with my accountant.) Basically, any money you spend that's related to your means of income is deductible. You can parse out what your "means of income" is--so for example if you design books, books you buy are deductible. By the same token, if you're a professional cook, cookbooks are deductible but books about the history of Saskatchewan are probably not. Another interesting thing to me was that the definition of "means of income" is interpretable (as with most areas of law)--it's up to you to decide for yourself if you can make a case for your deductions if it comes to that. It's probably better to toe the line, but it's good to know where the line is.

Hire an accountant that understands graphic design also.

Seconded, Tan. A journalist friend of mine recommended my current accountant, who handles a lot of freelancers and small business. At my first meeting I asked him if he'd dealt with graphic designers and the fluctuations of cash flow in design businesses. He said, "Oh yes, one of my first clients for years was Milton Glaser." I let him do all the talking after that.

Likewise for anyone in the New York City area in need of a sharp and very helpful accountant, I'd be happy to provide his name and info.

When it comes to self-employment, I've heard rumors of health insurance programs that allow you to set up tax-free savings accounts equal to your deductible. I've also heard they can roll-over at the end of a year into an IRA, tax free.

Anyone else familiar with this?

Tips for those new to the field or freelancing on the side:

1) If you know you are not going to be paying in over $1,000 a year in taxes you do not need to file quarterly.

2) There is no limit to how many years you can show a loss in your business as long as you can prove that you are conducting your business in a business-like manner. How do you prove that? Have a business plan (in writing), business cards, office (can be a home office). If you show a loss a few years in a row you may want to consider business counseling or seminars to prove that you are making an effort. If you fail to prove that you are running a business, your "business" can be declared a hobby, thereby excluding all deductions taken on your taxes.

3) Keep a business diary. Record all business miles driven (and where you went). Enter this information within 24 hours of the driven mileage.

4) Know the square footage of your house and the square footage of your home office. The percentage your office occupies of your home can be deducted from major home repairs, such as a roof.

If anyone would like tax code references to these tips just email me.

One more simple tax tip. My wife used to be pretty bad about holding back enough for her freelance work. So to compensate, I claimed zero deductions, and at times, even added additional withholding ($50-100 per paycheck) on my W-2. It saved our asses some years. And in years when we owed less, the extra withholding surplus became a vacation fund.

only problem with that is that you're essentially giving the government an interest-free loan for the year. the mere though gives me a rash.

Klied -- what you are referring to is commonly known as an income "cafeteria plan." Pre-tax income can be withheld for a variety of business deductible expenses, including healthcare deductibles, transportation/parking, etc. Some of these costs are tax-deductible, some are not -- but these types of plans allow you to have more control of your money and tax allocation up front. And yes, the fund is essentially an annuity--which is tax-sheltered unless you use the funds. But because it's an annuity fund structure, you have to choose a yearly set amount and dedicate a portion of your income to it. But the advantage is that you can draw from it, essentially borrowing from yourself. Say you set up the plan to pull $2,000 a year from your income ($80 per paycheck). Then, in February, you break your leg skiing and become hospitalized, and your deductible is $2K. If you didn't have the plan, you'd be screwed. If you had the plan, you can draw immediately from it the full amount, yet still pay it back throughout the rest of the year. Quite handy.

The question w/ a cafeteria plan is whether or not you need that percentage of your income liquid. And of course, how big your health deductible is and how likely you are to need it.

I don't know about other states, but in Washington, you need a minimum of 3 full-time employees (might be 4 now) to qualify for this arrangement. A variety of financial or insurance companies or broker can set it up for you.

All stuff you learn running your own business. Sorry if this was more than you wanted to know.

>You're essentially giving the government an interest-free loan for the year

Not really, because the surplus withholding is progressive, not a lump sum. Sure, you may lose out on a couple of interest percentage points (around $40-60 a year) in savings -- but unless you are scrupulously disciplined about your tax tables and savings, you risk much more than the relatively minor interest cost.

And it never fails in our house -- there's always some emergency expenditure that eats into the tax reservoir. We always say we're going to refill it, then before you know it, it's December.

You've also got to be honest with yourself, and concede to realistic savings and spending habits.

Randy Jones, over in the typophile forums, recommended Turbo Tax. It's much cheaper than H&R Block. Anybody have any thoughts about this or filing online in general?

I just started freelancing late last year (I'm just out of school) and only had an income for a couple months, so I hardly know the "rules" of the game. This feedback has been better than I expected (I didn't even have to bribe Armin!). One thing that I'm still unclear about is tax writeoffs. What does this all mean? Do I need receipts or not? Do I have to prove I used my new computer for a certain amount of business time, etc? What's da deal?

You've also got to be honest with yourself, and concede to realistic savings and spending habits.

Tan, I think we only need practical advice here.

I have a super accountant who finds every little nook & cranny thing for me to write off. Like even the sq. ft. of my hallway from the door to my studio. I just go to him usually a couple weeks before the deadline (freaking out), give him a whack of papers, and it all is magically done in a few days. I would HATE having to do taxes myself! Leave it to the professionals, it is worth their expertise.

I am interested in knowing more about pro-bono services and what/how to claim it because I do a bunch of that.

This claiming at a loss thing, could someone explain to me how that is done? I am not incorporated and run as a sole. I make a nice amount of money last year & i just transfer from my business acct. to my personal to pay myself each month. I don't have much to spare after expenses & taxes, but I do have some money sitting in my bus. account. Does that mean I am making a "profit"? Sorry if I sound like an idiot, but I don't get how it all works.

One thing that I'm still unclear about is tax writeoffs. What does this all mean? Do I need receipts or not?

Absolutely keep all receipts. It's the only way to prove you actually spent money. Your accountant doesn't necessarily need them (provided you give him a basic recording of your expenses), but the IRS most certainly will want them if it comes for an audit. Mine aren't particularly well organized, but I have them going back several years. I think the max time you need to keep them is 6 years or so, but don't quote me on that.

Amanda, claiming as a loss:

I went to my first accountant this year, largely because I am finally out of school and making money doing in-house design. Also, I did one freelance job on the side last year that didn't pay me very much because it was almost a pro-bono gig but I was aware that still counts as profit and you can still deduct business expenses off your taxes.

My business expenses were MORE than my profit, and thus I was operating "at a loss."

I don't really claim to understand, but the accountant said it was fine, and so... :)

"Randy Jones, over in the typophile forums, recommended Turbo Tax. It's much cheaper than H&R Block. Anybody have any thoughts about this or filing online in general?"

If you file your taxes with an accountant you are statistically less likely to be audited than if you file on your own. If you are audited, your accountant can help you through the process. One other tip, if you receive notice that you are going to be audited, refrain from calling your accountant in a panic. Call a lawyer. Have the lawyer communicate with your accountant for you, that way any correspondence will fall under the protection of attorney-client privilege. This last tip may, or may not be necessary. It all depends on how confident you are in the records you have.

I would HATE having to do taxes myself! Leave it to the professionals, it is worth their expertise.

See now this is very interesting in how it reflects (inversely) so many of the other hand-wringing discussions here about how clients don't understand or appreciate our expertise when it comes to design. Would a client ever say "I HATE thinking about my logo--you do it." Might be a lovely scenario. I don't have a point here--it might be as simplistic as "Design and accounting are different.' Duh. But if only we could make designing as unappealing to our clients as book-keeping...

>Tan, I think we only need practical advice here.

...I prefer to think of it as the 50"-plasma-HDTV-tax-refund-incentive plan. How more practical can you get, Jon?

>Have the lawyer communicate with your accountant for you, that way any correspondence will fall under the protection of attorney-client privilege.

Damn Bill-- you know tax codes, and legal strategies for audits?! Hmmm...sounds like you've either worked for the dark side in the past, or have had significant run ins with them. Or maybe you're really Willie Nelson.

"Damn Bill-- you know tax codes, and legal strategies for audits?! Hmmm...sounds like you've either worked for the dark side in the past, or have had significant run ins with them. Or maybe you're really Willie Nelson."

Sorry Tan, no dark side experience. Just a healthy fear of the IRS which has spawned a recent tax knowledge binge prior to jumping into the full-time freelance ring. There are sooo many things which can be deducted from taxes. The catch is, that with many deductions a box of receipts won't help. I won't even get into writing off "Dutch treat meals", but if you really want me to…

Any chance someone with a designer-knowledgeable accountant can get him/her to respond to some of the questions that have been posed in this thread?

> Would a client ever say "I HATE thinking about my logo--you do it."

Touché.

Dan,

A write-off, as I understand it would be this:

Let's say you made 40,000. (the total amount of money that you made from the 1099s or W-2s you have recieved from the work that you have done).

And you have a total of 10,000 in business expenses.

You would take the 10,000 - 40,000 = 30,000.

Now you would pay tax on 30,000 instead of 40,000.

The 10,000 comes from the receipts you have been saving. Put those receipts into a excel doc, it's really just a list that Excel will total it up for you.

This is super timely, I am making my spreadsheet for 2003's expenses today. I save all my receipts in a folder and now I am just going through the folder. I've got a date, vendor, category (ie: supplies:computer), amount. My monthly dsl, cell phone, and home office cost. ( a tricky percentage of my office in relation to my house, which I have not quite figured out.) I think it's like this: if my office is 10% of my home. Then I can deduct 10% of my monly mortgage payment. I think I have that right. Basically you want to have a receipt for all you deductions, so that if you are audited, you can prove your deductions.

I went and meet with an accounting who has a bunch independant contractors for clients. He was nice enough to give me a free consultation on good practices. This is some of what he told/gave me: He recommends having a separate checking account for business, separate credit card for business (then you can have a nice, neat list of yearly expenses on your statment) and to keep track of your deposits.

This comes from the list he gave me:

Deductions. A brief checklist

business auto - unreimbursed. need total miles, business miles, communte miles, employer reimbursments - $ amount, actual auto expenses (gas, insurance, wash, repairs, and any other including ski rack or radio)

transportation (for me it's public trans $3.00 a day)

computer, computer-peripherals and software: internet service subscriptions....

faxing, printing and reproduction

publications and subscriptions

supplies, briefcase, calendar, calculator, etc. (anything in your home office - used for business purposes)

telephone calls, cellular phone

dues and memberships (you can write of your beloved AIGA's membership/event costs)

art materials/portfolio costs, laminating, ect

job hunting - resumes transportation, postage and delivery...

Then you take print out of your list to your tax preparer.

Getting a consultation from a accountant is a good thing... what i did was ask other independant contractors (freelance designers) who they use or if they know anyone they would recommend.

A large agency (like iLeo) may take out the taxes for you. That's pretty nice because you don't have to worry about paying for that income end of year. Then you have your 1099s or not. Cash ain't if you can get it. Be honest about your business.

If i am off on any of this, please set me straight.

i meant to type "Cash ain't bad if you can get it." You could have clients make your check out to Creative Art Service House or CASH!! Ha. that is a dumb joke.

It is still best practice to be honest. It will save you stress, panic, headaches and more work later on.

"telephone calls, cellular phone"

If you have only one phone (land line), you can only deduct long distance business calls. Local calls can only be deducted on the second (business only) line.

Some quick notes from others comments: you can write of meals but you will only get 50% of it, and the meals have to be "business" meals (i.e. more than one person) not your everyday lunches. This goes for transit too - regular everyday get to work/home is not deductible but transit to clients or business related is legit (both lunches and daily commutes are not specific to being self employed as everyone has to do these things). Software is deductible that year but hardwear over 3 years.

For Lea:

I would like to know more tax tips on the CANADIAN side of design business. Especially about pro-bono and donated services, which I believe can be tax deducted...

I can't remember if the tax deduction did much since I stopped claiming my pro bono work several years ago. I found claiming pro bono jobs to be more work than it was worth. If you make more than 30K(?) then you have to charge GST which the gov collects regularly, then gives it back at the end of the year. You have to pay them the GST even though you are not collecting it for that pro bono job. Becomes a paperwork mess and money out of your pocket for months. Does that make sense?

The real pain/debate in Canada is the PST. Its a real grey area as to who charges it and for what jobs — The RGD is trying to clarify and get rid of it (other similar business' like architects do not have to charge PST)

I've been a freelancer / contractor for a few years now, and I've always used Turbo Tax Deluxe. I tried the accountant route when I first started, and while he was definitely helpful, once I felt I had a good grasp on the basic concepts of taxes -- paying quarterly estimates, filing receipts, tracking expenses -- I was able to use Turbo Tax on my own.

Plus...once you start using Turbo Tax, you have a data file you can import into all future versions. In other words, for 2003, I imported my tax return from 2002, and then simply edited the stuff that needed to be updated / added. Importing last year's data also catches any carryovers that may need to be applied (which helps lower your tax bill even more).

The first year is always the hardest. Taxes always suck, but at least you can prepare yourself in small steps throughout the year to make tax day easier.

When it comes to self-employment, I've heard rumors of health insurance programs that allow you to set up tax-free savings accounts equal to your deductible. I've also heard they can roll-over at the end of a year into an IRA, tax free. Anyone else familiar with this?

They are called Health Savings Accounts and there is one by Fortis (who is now Assurant Health). Also called High Deductible plans. Here's a link to a FAQ style info page on them.

I was shopping for medical as a self-employed person last week and stumbled across this. Hope that helps.

I recently switched over to ibank and iwork from

http://www.iggsoftware.com/ibank/

made my accountant very happy that everything was nicely catagorized and cut my bill inhalf

soo much easier than any intuit product

no I can actually see how my business is doing!!

My accountant was grandfathered in from my parent's days in self-employment, who used to run the gambit for one of Ohio's largest financial firms. To do my taxes, he charges $55 US, which is a steal when you consider accountability and pure experience.

He's definitely old school, tho'. He got a real chuckle when I started listing 'typeface' expenses.

I take my stuff to my financial advisor, who not only takes care of my taxes, but makes sure I pay as little as possible. A good financial advisor is worth their weight in chocolate.

I am the wife of a freelance multimedia developer and the one who has historically done our family's financial books and taxes. As with most other entries here, I agree that paying someone to do your taxes is very wise. Tax laws change from year to year, making it difficult to keep abreast of the latest information. For example, in Oregon the last two years that my husband has been freelance, it was not a good deal to claim our home office because of stiff penalties, if there was a chance we would be moving from this home within three years. Oregon laws changed in 2003 so that it is now possible to count our office, even though we are moving in 2004.

I recommend using some type of accounting software, such as QuickBooks for Home & Office. This has been a great way to track estimates, invoices and expenses related to his business, as well as our regular home finances. You can print easy-to-read reports to hand off to your accountant-- which they appreciate much more than a box of receipts!

If there are any art professors checking out this site, perhaps you could help prepare those under you by providing coursework on these topics! Having a BFA is great but it doesn't provide any insight as to running a small business.

As a freelancer last year I only made about 5k, but my wife and I sold a home and bought a new one so I figured on it was time to hire a CPA. Especially since I registered the business name and want to be legitimate as possible. He did the family taxes and a schedule C (extra income) for $300 bucks. We got about 2k back but more than that I got tons of invaluable information from him. This year, in the first quarter, I have already doubled last years total income, so there are some things I had to do for this year to not get socked in the end.

I was advised of the following:

Use Quicken to track all money

Get a totally sperate bank account

Use Excell too

Calculate my income, subtract my expenses, and based on that gross income, give 30% each quarter to uncle spam.

keep all receipts, quicken or quickbooks records don't account as a receipt

expense everything!

If I am at dinner with friends and we are talking business, have the business credit card pay for it!

Reinvest as much of the profit (everything after expenses and taxes) into the business, advertising, equip, etc.

Don't deduct my home, it isnt worth the hassle. Plus it puts up flags with the IRS

Deduct things like phone, cable modem, meals WITH CLIENTS, travel to and from clients (.36 a mile adds up), equipment, CD's and Mag's for research, memberships, subscriptions to industry related items.

DONT put the car in the business name, it isnt worth the haslle

Most important though, I think, is to pay the quarterly taxes. I am not good at hiding money from myself to pay at the end of the year. And get a CPA.

Best Regards,

Steve

Hi! I am a graphic design freelancer in New York City and I was hoping if somebody could recommend a sharp and very helpful tax accountant.

Thanks!