Freelance and paying taxes

[F Bulgarelli]

Hello everyone,

 

For all of you freelance Dp's, AC's, Operators, etc.

What's your approach when it comes to running your business.

Do you think is a good idea to create a corporation or LLC? How do you go about deducting expenses, purchases, office space, anything that will keep you from having to pay too much taxes to uncle sam.

Do you file separate or with your wife?

 

Any advice will be greatly appreciated.

 

Thanks

 

Francisco

[Nathan Milford]

I'm also very interested in other's business structures. My fiancee and I are about to start our own LLC in NY pretty soon.

[Bill Totolo]

Francisco,

 

I'm considering the same issues. I have a new accountant recomended from the freelance pool of producers I work with. I'm sure he'd be able to answer all of your questions. His name is David MCColloch:

 

323-254-2232

Tax Maniax

 

Bill

[Max Jacoby]

That's interesting. In the US you can only deduct expenses if you have a company? Here in Luxembourg I am considered an independent (i.e. freelance), so I can deduct expenses that way. Fuel, restaurant bills, travel, etc...

[monster vs robot]

That's interesting. In the US you can only deduct expenses if you have a company? Here in Luxembourg I am considered an independent (i.e. freelance), so I can deduct expenses that way. Fuel, restaurant bills, travel, etc...

 

 

You can deduct those things as an individual(sole proprietor) becoming an LLC or Corporation provides additional protection to you and your personal assets in these structures.

[timHealy]

That's interesting. In the US you can only deduct expenses if you have a company? Here in Luxembourg I am considered an independent (i.e. freelance), so I can deduct expenses that way. Fuel, restaurant bills, travel, etc...

 

No that is not accurate. They have mislead you. You can deduct business expenses in any sort of business set up whether it be an independant contractor, freelancer or a business like an LLC or incorporation. The best advice for anyone in the film business or any freelancer is to get a good accountant. They will save you tons of money especially if one is agressive and their fees are a business expense and deductible for the following year. A good accountant wil become your advisor to what you can and cannot do. Plus it is there job to stay on top of new rules year after year.

 

being incorporated (and I think LLC) is a great thing to do as it protects your family and personal assets if you are running a business where you may be sued or liable for damages after accidents. They do happen and you should protect yourself by doing that if you run a company of helicopter tours or interstate trucking company.

 

One thing though is that if you are a freelancer you may not be an independant contractor. The IRS changed some rules years ago after many independant contractors did not pay their taxes. Now on many of the larger movies I work on, since I have to report to the set at a time specified by an employer I am an employee as far as the payroll company (the employer of record) and IRS is concerned. Someone like a production designer who makes their own calls is more of an independant contractor. Or something like that. As far as paying may taxes I consider myself as a freelancer and give the accountant a summary of what I spend and where.

 

Best to see an accountant for all the accurate answers.

 

Best

 

Tim

Edited April 13, 2006 by heel_e

[Guest]

The simpliest method is to phone the IRS and give them all of your bank account details, ask them to take the taxes out of your account each month.

 

The IRS has a long history of honesty and fairness so you have nothing to worry about.

 

R,

[Phil Rhodes]

Hi,

 

My last accountant took nearly five months to do my books, which should have taken him about half an hour.

 

Since it's "that" (shudder) time of year again, I think I'm going to find someone else.

 

Phil

[Michael Nash]

The IRS makes it really, really, really hard for freelancers to file as "independent contractors." Regardless of how you get paid by an employer or whether you filled out any W4's, The IRS is staunch about wanting you to be an "employee."

 

There are of course workarounds, and your employer may not agree with the rules either. I've had plenty of employers who insisted on paying for my services as "expenses," keeping me off their books as an employee, but still leaving me on the hook figure out my tax (or else risk getting caught for non-payment).

 

99% of the work I do as a freelancer is under the employer-employee relationship, and taxes are withheld normally. I compile several W2's when I file.

 

Deductions are another story, and depend on your situation. I'd be interested in hearing more about how others handle this.

[F Bulgarelli]

I've heard that you can actually deduct the cost of "leasing to yourself" your office space at home.

Also, what about all the time you spend researching before a shoot, I mean, that's a lot of work.

And what about starbucks meetings, lunch meetings, fuel.

 

I'm sure there is a fine line as to what is deductible and what isn't and that's where the accountant comes handy.

 

I appreciate all the responses, keep them coming.

 

Thanks

[Travis Cline]

Let me preface by saying I am not sure this is correct, but it is the way I do it and as far as I know it is correct. I get paid both ways, as an employee(W2) and as an idependent contractor(1099), depending on what the production and I work out together. The taxes are already taken out of the W2's, but then I deduct my expenses from what I owe as a self employed tax payer. I write off mileage, cell phone, lunch with clients or potential clients, clothing for work, DVD's, movie tickets, TV bill, advertising(reels, business cards, resumes, etc.), even office space in my house. This one is new(a few years old) and I don't understand it fully, but you can write off whatever percentage of your house you use as an office including utility bills and mortgage. H&R Block says its cool and I have a gaffer friend who was audited and they said it was fine. It is not necessarily a red-flag to the IRS, but if you do qualify it is fine. Whatever you want to write-off, make sure you keep receipts. If it is reasonable and you can prove you paid for it and that it was for your business you should be ok, within reason. Something new I found this year is that you can write-off your Medical insurance premium. I can't remember where you write it off at the moment. I don't think it is on Schedule C, but maybe. Does anyone know where you write that off? A friend pointed it out to me and it was very explicit in the tax forms that you could write that off. Anyway, good topic and I'd love to hear more from others.

[Bill Totolo]

I've heard that you can actually deduct the cost of "leasing to yourself" your office space at home.

Also, what about all the time you spend researching before a shoot, I mean, that's a lot of work.

And what about starbucks meetings, lunch meetings, fuel.

 

I'm sure there is a fine line as to what is deductible and what isn't and that's where the accountant comes handy.

 

I appreciate all the responses, keep them coming.

 

Thanks

 

 

You go to "Office Depot" and buy a journal that says 2006 on the cover. Then you log your daily expenses. Every lunch, mileage driven, movie tix, etc. Just call the accountant, he'll break it down for you.

 

 

bt

[Phil Rhodes]

Hi,

 

Comparatively:

 

It's reasonably easy to go freelance in the UK. Generally if you work for someone for more than three months, particularly if you have no fixed end date, they start getting a bit suspicious because they want you to be an employee, mainly I think because it's easier for everyone.

 

I just keep a file of invoices that've gone out and come in, and a stack of receipts for expenses (the vast majority of which comprises a stack of rail fares between here and Liverpool Street...).

 

The problem I have is that I am starting to do documentaries where handling what's effectively the entire production budget through a personal bank account is getting a bit iffy.

 

Phil

[F Bulgarelli]

Do you guys think is reasonable to somehow calculate a deduction for personal time one spends doing research for a project. I mean, other than the time you get paid by the production company to do preproduction. Sometimes, you might start doing your own prep before the official start date.

 

Thanks

[Michael Nash]

The problem I have is that I am starting to do documentaries where handling what's effectively the entire production budget through a personal bank account is getting a bit iffy.

 

Phil

 

Never a good idea. When starting to take on more producing/production company duties, it's easy enough to set up a new bank or credit account to handle the transactions. Better than that of course is to properly set up a separate business entity, which is pretty easy here in the US (Sole Proprietorship, LLC, or S-Corporation). We have something called the Small Business Administration which can help small businesses navigate the logistics.

[Mark Allen]

Do you guys think is reasonable to somehow calculate a deduction for personal time one spends doing research for a project. I mean, other than the time you get paid by the production company to do preproduction. Sometimes, you might start doing your own prep before the official start date.

 

Not a CPA or tax attorney here, but in general the IRS doesn't care about your time at all. Your time is not worth anything as a donation or as non-paid researcher etc. Just like you cannot write off your time for a charitible donation, you cannot write off your time for doing research for a project. You can write off classes, books, perhaps even required travel for that purpose though.

[shootist]

You can't deduct time spent doing research. What is the value? That would be never ending. I sit around and daydream how to best shoot something next week. Deduct $100 per hour for daydreaming? You deduct expenses. If you hired someone to do some of the research, you can deduct their cost.

 

I incorporated years ago for 2 reasons. One was to establish a bit more separation between me personally & the business for liability. The second was for retirement planning. individuals are allowed to contribute something like 17% to a retirement plan but corporations can go with 25%. Now I did this a long time ago so I don't know what the current limit is for individuals but corp contribution is still 25%. That means that every time my company pays me $1000 it also sends off an additional $250 to my plan. Potential downside is that you have to give the same plan to ALL permanent employees. Do the research on this setup. The other downside is I am contributing a little more to SSA, which I'll never see. Individuals pay, I think 12% to SSA but corp do 7.5% of your money and 7.5% of their money. Since it's my corp, it's 15% of my money vs. 12% of an individual. That 12% might be wqrong, I haven't dealt with it in many years and they may have upped it.

 

As for office in the home, my accountant tells me there is a check box for deducting that and the check box can generate extra scrutiny. Even if you are clean, who wants the hassle. If you do take the deduction, do not deduct any part of your mortgage. If you do, you will have to give it back as a percentage of the gains you get when selling the house.

 

Whatever you do, talk to a good accountant. Ask around to see who has used one for a while and is happy. There are some loosers out there.

[Tony Brown]

The problem I have is that I am starting to do documentaries where handling what's effectively the entire production budget through a personal bank account is getting a bit iffy.

 

 

Oops

[Jayvid]

I have been Freeelance since 1979 in PA. Incorporated in '81 as a sub S corp. My wife has a BA in accounting and an MBA and has been invaluable as an accountant and business advisor even though she knows little about the details of the production business. We hire an accountant to prepare our taxes, but the day to day stuff as well as the final reports are handled with little pain in Quickbooks. As with any software the inital set-up is really important.

 

My advice/experience has been if you are going to create a business in your home, get a seperate telephone line, have space that is 100% used for business, letterhead, envelopes and business cards with company name although very old school go a long way in establishing credability with the various taxing authorities, use a seperate credit card exclusively for business expenses, a seperate checking and savings account...we use a completely different bank from our personal finances just to help keep things seperate and right from the start get an accountant that understands what you do and how you do it. And remember, the accountant works for you. Shop around and find someone that you like. We have an independent guy that is not part of a firm. An independent working for a freelancer...works for me

 

The inital set up of your accounts, books and expenses is worth the extra time and some expense...less than 1K...to making the business side of your workflow as painless as possible. And remember, yes you can write things off, but you must make money before you can write off expenses.

 

Also, if you are going to create a business that is just you...consider using your name in it. I made the mistake of choosing a LONG name that nobody really remembers...Video Communication Productions. Any more I just use J

 

 

Good luck

 

J

[Michael LaVoie]

This issue of personal taxes for freelancers in the US should be looked into. If anyone has caught Aaron Russo's new documentary , America: From Freedom to Fascism, you are aware that the gov't and the IRS together have mislead the public for almost a century on this issue of personal income tax.

 

There is NO constitutional basis for a tax on the wages of the average american living and working in the US. The term ''person'' in the internal revenue code is defined as an officer or employee of a corporation, or a member or employee of a partnership.

 

Taken from non-taxpayer.org

All federal tax forms are only applicable to the following circumstances:

 

* Direct financial involvement with the United States government.

* Payments made/received from certain federally regulated financial markets.

* Foreign business activities in the United States.

* Conducting domestic business in certain federally regulated businesses (Subtitle D & E matters).

 

Form 1099 is for reporting payments made by a governmental entity to a person acting as an independent contractor to that governmental entity. It is not for reporting the money paid by John?s Shoe Repair to Vinnie The Plumber! Form W-4 is to be completed and signed by certain government employees, not by the workers at Fred?s TV Repair. Form W-2 is for governmental entities to report the wages they have paid to their employees, but it is not to be used to report the compensation paid to the workers at Joe?s Computer Repair. In fact, all ?reportable payments? [see §3406 and Federal Income Tax] relate solely to the four categories shown above. If what you?re doing is not within one of those four categories, it?s not a ?reportable payment?.

 

What I've got out of all this is that a person's labor is his or her private property and you have the legal right to contract out your labor as you see fit. The wages you earn for yourself are not technically taxable. The problem is that people voluntarily comply with a process that is not intended for them when they file and as such make themselves liable for reporting inaccurate information. This entire process also violates the fifth amendment under which you have protection from doing or saying anything that might incriminate you.

 

Most people have little choice in the matter as their employers force them to submit a SS# and as such, an "information request" is made and the IRS process is automatically forced on them. As freelancers and independent contractors, it is entirely up to us whether we take part in this extortion scam. People do get in trouble and go to jail all the time but a certain percentage take it to court and ask "Where's the law?" and are sometimes released when it is apparent to all that there is actually NO law that says you have to file. Unfortunately this depends a lot on the judge and whether he abides by the Supreme Court decisions made in 1913 which have never been overturned. It's a risk but standing up to a bully always involves risk. If you decide to file, please at least keep up with this issue and put pressure on congress to put an end to this scam once and for all.

[Michael LaVoie]

In all fairness to the IRS, here's their rebuttle to the aforementioned arguments.

IRS tax laws

 

Each side in this argument seems to have their own take on the Internal Revenue Code and the issue of context and definitions of terms. It's unfortunate that there is this confusion. There are court cases won on both sides of the argument. Personally, I'd keep filing if I were you as there seems to be enough people who've already gone to jail for not filing. Still, the issue of the 16th amendment is one that gives me pause. The supreme court made a few notable decisions on the issue claiming that the amendment gave the gov't "no new powers of taxation". Although they said this, it's clear that the present courts don't seem to care and since they have the power to find you guilty of failure to file, you might be fighting a losing battle.

[Guest]

Fairness to the IRS? That's some what of an oxy moron. Ask them for "fairness" if you ever get audited.

 

I lived in the USA for five years. I had to take on the IRS two times, proud to say I defeated them both times, on the second occasion they owed me money!! But what a nightmare.

 

Revenue Canada is just as bad, in priniciple I will not associate with or make a friend out of any Rev Can employee. What business person in their right mind would associate with a tax auditor?

 

IRS and Rev Can employees fully deserve every bit of societal shunning they receive. They work for highly corrupt and patently evil organizations.

 

Has any one ever looked at the tax code for the nation they live in? It comes in 67 volumes each one 2000 pages thick. Now here's the kicker, no IRS or Rev Can employee understands any of it, yet we as tax payers are expected to. I realize this is mainly the fault of the politicians who have made tax law more complex every year.

 

Give the IRS a call, ask them a question, note the answer. Call them right back, ask the exact same question, guess what you'll get a completely different answer!! Try it.

 

Give your taxes to five different professional accountants, you'll get five different returns! Each one will interpret the tax laws differently, which one is right?

 

In the USA it's estimated that 30 million people don't even file a tax return, they are either very poor people, working poor, or illegal aliens. They just skip the entire process. Then there's the super rich that can hire an army of lawyers and accountants to keep their money out of the hands of the feds.

 

So who does that leave to pay the taxes? Middle class working suckers who can't escape. Great system, really fair. Canada, again, just as bad.

 

The time has come to eliminate 100% of all deductions, and loop holes, and go with a fair flat tax applied to every dollar earned. There is no reason why every citizen of the USA and Canada should not be able to file their taxes with one simple form that takes two minutes to complete every year. (for self employed "dollar earned" means after expenses of course).

 

R,

[Hal Smith]

The time has come to eliminate 100% of all deductions, and loop holes, and go with a fair flat tax applied to every dollar earned. There is no reason why every citizen of the USA and Canada should not be able to file their taxes with one simple form that takes two minutes to complete every year. (for self employed "dollar earned" means after expenses of course).

And that would be fair to the working poor as opposed to the filthy rich in just what way?

 

I know a working single mother with an uncooperative ex-husband and a eleven year old boy with special needs. Sometimes just gas money to drive to work can be taxing on her income. That helps me to understand just how incredibly unfair a flat tax would be in a nation where corporate royalty can make 10,000 times what their lowest paid employee makes.

 

Level the income field a bit, then propose your flat tax.

 

If you're registered with the NY Times have a look at this article in today's paper.

 

http://www.nytimes.com/2006/11/27/business...artner=homepage

 

I live in Oklahoma. All new roads are being built by a toll road authority with no governmental oversight. As a result it is differentially more expensive for poor people to drive. I earn an income that makes a $7.50 toll to Tulsa chump change, to a poor person that's two or three days food money stuffed in the OK Toll Authority's maw.

 

Progressive taxes were implemented by the Roosevelt New Deal to attempt to stave off a Socialist revolution in the US. They worked, but now the super rich have again bought themselves a government that protects their interest. I'm not certain if the new Congress has the b*lls to reverse the situation.

 

PS: I'm self-employed owning a small business, pay a fair amount of taxes, and haven't seen a single one of the "tax cuts" implemented over the last ten or so years. None of them went to small business, all of them went to megabusinesses and their investors. I'll guarantee you any "flat tax" implemented would have hidden loop holes that benefited the super rich and their friends.

[Guest]

I never understood why "the poor" should be exempt from paying taxes in the first place? They use the social services and roads just like I do, so they should contribute just like I do. Churches collect tithes and donations from their poorest members in the USA and in third world countries. If churches can collect donations from the poor, then why can't governments collect a small amount of tax?

 

(FYI, I grew up well below the poverty line in a single mom home with my two small sisters. I know what poverty is like, it's not fun by any means.)

 

I'm not saying make the flat tax rate 51%, I'm talking about 13-15%, for every one. That's what I call fair.

 

The wealthy will end up paying way more in tax than they do now because the thousands of loop holes they use to avoid taxation will all be closed. Period.

 

Sure the USA has a progressive tax system, so does Canada, but the top earners avoid the tax man so what is the point?

 

As you pointed out:

 

"but now the super rich have again bought themselves a government that protects their interest. I'm not certain if the new Congress has the b*lls to reverse the situation. "

 

Yes, right....so a flat tax will solve this problem. No more tax write offs for driving a $80,000.00 SUV, which is what happens in the USA right now. Did you know that? Some SUVs are so heavy they qualify as a "farm vehicle" so the owner gets a tax break. Now that's what I call stupid with a capital "S". Under a flat tax system, ridiculous rules like this will be gone.

 

R,

[Brian Wells]

PS: I'm self-employed owning a small business, pay a fair amount of taxes, and haven't seen a single one of the "tax cuts" implemented over the last ten or so years. None of them went to small business, all of them went to megabusinesses and their investors.

Section 179 (which permits a small business to fully expense tangible property in the year it is purchased, up to $100,000 per year) has been AWESOME for small businesses. It has allowed them to rapidly increase production capability (i.e. - tools) without paying ANY taxes on the income used to purchase the property. This was done to encourage GROWTH in small businesses by stimulating capital expenditures. I know of more than one lighting rental house that has taken advantage of that! Also (as a small business owner) you could have bought a HUMMER completely tax free (or any vehicle over 6,000 lbs.). That law was recently amended (in May, 2006) to commercial vehicles over 14,000 lbs. No more buying HUMMER's as business expenses. :-(

 

*I am NOT a tax advisor. You should consult a certified public accountant before filing your taxes *