Freelance income: Advice needed

**sweeps** · 03-14-2008, 07:18 PM

The easiest thing to do is use your tax planning software (or a blank 1040 form and pencil) and plug in what you think your new numbers will be. You'll see how much extra in taxes you'll owe and can plan from there.

It will be easier to have your and your spouse's employers withhold more income to compensate for the freelance income, rather than making estimated payments... but that's optional of course.

It sounds like for your situation, I would just stick with the Roth IRA for the time being.

**TBH** · 03-15-2008, 05:30 AM

Thanks, Sweeps.

Spouse and I are unmarried, so it won't help to have his employer withhold more taxes. I don't use tax software. We have to file on paper because of some oddities related to the fact that we're not married, have a child together, and own real estate together. For example, to take the mortgage interest deduction we have to include a letter stating that this property is owned jointly with this other person, and that only one of us is deducting the mortgage interest.

I still need to do my 2007 taxes. Then I guess I'll play with some projections for 2008.

Why do you think I should stick with the Roth? If I no longer have an employer paying part of my social security and medicare taxes, doesn't it make more sense to make before-tax contributions to a retirement account?

**sweeps** · 03-15-2008, 05:45 AM

Ok, sorry, assumed you were married.

Your income is still relatively low, so a Roth IRA probably benefits you more in the long run. (Also keep in mind that $5,000 of after-tax contributions is worth more than $5,000 of pre-tax contributions.) Plus it seemed like you didn't want to go through the hassle of opening another retirement account.

One clarification... contributing to a SEP IRA does not lower the SS/medicare taxes you have to pay, just your income taxes. You can always do both a Roth and a SEP later if your income continues to grow. Again, in your tax planning software, see how contributing to 1 or both changes your numbers.

**MonkeyMama** · 03-15-2008, 06:12 AM

I would definitely use your tax software to get an idea of estimates.

Likewise, for Federal, if you pay in 100% of your 2007 taxes (Look at line 63 of the 1040 - Total Tax - though you can deduct any credits (child tax credit?) to figure your true tax for the year)... If you pay in 100% of that for 2008, with your withholding, then you do not have to pay in any estimates for the year. This is called the "safe harbor" rule. Generally helps people avoid IRS penalties if their income is unpredictable, etc. States generally follow the same rule. You can wait until next April 15th to pay it in, when you do your 2008 taxes.

Anyway, 35% seems fair since clearly much of it will be taxed at the 15% Federal rate, and some at the 25% rate. Plus 15% self-employment taxes. If you have the discipline to set it aside and not touch it? I wouldn't bother doing any estimates. Then you can get an idea by your tax situation when you do your 2008 taxes, and you can do the 100% rule the following year as well. (Which means you would probably start paying estimates in 2009, based on your 2008 tax).

I am not sure what state you are in, but same kind of thing. Don't forget the state.

I agree on the ROTH advice. The general advice I have for SEPs is to figure it out when you do your taxes. Who knows, you may have extra money early next year and decide to fund a SEP to lower your taxes. But trying to figure it out before the year end is usually nearly impossible. So when you do your taxes next year, see how much you can put in your SEP, and decide if you want to put in any over your ROTH.

But yes, definitely fund the ROTH first.

& here is a good article on the subject:

How_to_avoid_underwithholding_and_its_penalties: Personal Finance News from Yahoo! Finance

Just to clarify if anything I Said was confusing...

**TBH** · 03-15-2008, 06:31 AM

Thanks, Sweeps and MM, this is exactly what I needed, especially MM's advice about waiting to file estimates and her reassurance that 35% will probably be in the right ballpark.

So, I'll keep saving 35% for taxes, up the withholding a little bit on my dayjob, max my Roth and my spouse's Roth, and just focus on avoiding lifestyle creep since my household income will probably go back down next year. (If my freelance job ends next year, my income will go back down. If it doesn't end, we may take the plunge and have my spouse quit or reduce his work hours.)

Sweeps, it was reasonable that you assumed I was married. That's what spouse means, after all. I sometimes use "spouse" instead of "partner", especially in financial conversations where I worry that people might not 'get' my domestic situation. In this case I just made things more confusing!

**TBH** · 03-15-2008, 06:46 AM

If anybody's curious, here's what I plan to do with the extra income:

35% set aside for taxes (any excess will be divided between E-fund and our retirement accounts at the end of the year)

10% to my Roth
10% to partner's Roth
5% prepayment on mortgage
5% to our emergency fund/short term savings account

10% to current bills, including a few things that will make it easier for me to work more, like hiring a cleaning service and paying for extra childcare. The goal is to change our lifestyle only in ways that can easily be eliminated if our income returns to its usual level. We can always stop the cleaning service and the extra childcare.

25% savings for future living expenses. This will allow my partner to reduce his work hours in the future, or if he chooses not to do that, we'll probably just take this money at a certain point and use it to do something big like pay off our mortgage. Also, if our family is going to be relying on my very irregular income, I want to have a much larger cushion than the 6-month E-fund we have now. Currently we can get by on my partner's income and the income from my part-time dayjob. If I start being the main breadwinner, that's a bit scary not only because my income fluctuates, but also because I have some ongoing health issues that could crop up again and take me out of work for some time.

I'm about 90% sure I'll get the job, but I won't find out for another month, probably. I started out trying not to count my chickens until I got the offer, but I gave up and I'm making the plans so I'll be ready if it happens.

Feedback welcome! It is, of course, a great thing to have our household income go up so dramatically, but it's a little overwhelming. Any advice is appreciated.

**maat55** · 03-15-2008, 07:18 AM

The best thing you are doing is, planning what to do with the extra income instead of just blowing it. Reducing debt and increasing wealth will serve you well for the future. Good job.

**TBH** · 04-30-2008, 01:28 PM

Update on freelance gig:

I did get the gig, with two major caveats.

1. It got sliced in half, so it will be a lot less income, but also a lot less work. Which is good, because I don't want to put my son in full-time daycare and I also don't want to give up my other part time job which has good benefits and good job security.

2. It hasn't started yet. In theory it should start at the end of May, but it keeps getting delayed. I'll be paid a fixed amount each week, so the longer it gets delayed the less money I'll earn in 2008. I am of course frustrated that it keeps getting postponed, but also not looking forward to the additional drain on my time so in some ways it's good.

So I'm still waiting for it to start, and I've adjusted my plans for the additional income somewhat. I'm still going to put 35% aside for taxes and 20% aside for retirement, but the rest will mostly be saved for a big change--either my spouse will quit his job in a couple years or we'll move to a different, more expensive house.

**StanFatherof3** · 05-06-2008, 07:33 AM

I just wanted to applaud you for planning ahead for your tax liability from your freelance work. I see so many people who don't and get a nasty surprise come tax time.

**Tree0164** · 05-08-2008, 02:42 AM

I do freelance work from time to time. I am married so I have my husband withhold a higher % of taxes. I also withhold 25% and put that in a separate account. We have never owed so I haven't had to deal with quarterly taxes.

I would adjust your withholding a bit higher at your other job and make sure you put 35% aside as you are planning

Freelance income: Advice needed