How To Make That 1099 Less Taxing

February 12, 2016

One of the TV moments that I still find absolutely hilarious a long time after its first airing is Reverend Jim from “Taxi” taking his driver’s license exam. This clip STILL cracks me up every time I see it. While Rev. Jim not knowing what a yellow light means is not a big financial issue (although, I swear that A LOT of drivers I’ve seen lately have absolutely no clue what it means either), not knowing what a 1099 means could provide quite a shock to the recipient.

I’m dating an accountant (at least until she figures out I’m more entertaining in this blog than in real life) who does a lot of tax returns for artists, actors and people in the arts community who aren’t W-2 employees but are paid on a project basis and receive 1099s for their work. She just presented a workshop for the local arts community about taxation and how artists get paid. (Most artistically inclined people that I’ve met, with exceptions for sure, don’t tend to be the best at building Excel spreadsheets or thinking about the financial implications of their art.) Nearly every client she has and every attendee at the workshop fall into the 1099 world and could significantly reduce their tax burden and simplify their tax life with just a few slight tweaks.

When I look at my paystub as a W-2 employee of Financial Finesse, I see amounts withheld (I may protest that they’re too high, but I can’t control tax policy) for federal and state taxes, along with Social Security, Medicare, etc. My tax situation is simple because of those withholding amounts. For those with a 1099, nothing is withheld and 100% of that income is reported to the IRS.  On that income, you’ll need to pay federal, state, local and self-employment taxes.

According to my accountant girlfriend, most of her clients don’t have that accounted for in their budget and because of lackluster record keeping, they are not able to deduct real and legitimate expenses that would be 100% above board deductions from their income. What can you do if you get paid via 1099 rather than W-2?  There are really two major steps that can be taken to make April 15th much less painful:

1. Every time you get a check from work that you’ve done, carve out a quarter of it and deposit that into a savings account. That way, you’ll have the funds when it’s time to write the check to our friends at the IRS.  If you want to make it even easier, don’t wait until April 15th. Make quarterly payment to the IRS.  They absolutely WILL accept your money – any day, any time. If you write a check and send it with this form, you can make tax time much simpler.

2. Keep records! Let’s say you’re a painter and you are able to sell enough of your work to eke out a living. When you go to the supply store, every ounce of paint you buy, every brush, every canvas, etc is a business expense. Those expenses can be deducted from your income and reduce your tax bite. If you teach a class at a local place and get paid for it, your travel expenses are a legitimate business expense and should be deducted.

You’ve heard the saying “it takes money to make money?” When you are spending YOUR money to make your income, you deserve to have that taken into account. It is 100% your responsibility to do that accounting though. Yeah, it’s not exactly as fun as saying “go to happy hour more often,” but it’s actually an effective way to minimize the amount of money you have to pay on April 15th.

Hold yourself to the same standards of accounting as you do with the talent you have that drives your income. If you do that, tax time no longer becomes a scary time of year. Save the scary for Halloween!