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 organized. 

Okay, so these records have to be good, but what do they actually have to be? Well, let's find out in:

So, okay. Let's 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 delicacies, 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 organization 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 pepperonis 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 pizzas. 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-emphasize 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, let's 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: 

1. Hire a pro


2. Keep good records of income and expenses throughout the year, furnishing and receiving 1099-MISC forms when appropriate 


3. Pay quarterly taxes for both self-employment and income taxes throughout the year, and


4. 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!