What every freelancer should know

Tired of getting gouged on your taxes? Sensing an impending mental breakdown? Here are tips for the self-employed, from someone who feels your pain.

By Catherine Price

Read more: Taxes, Life

iStockphoto / Benjamin Brandt

April 15, 2008 | I could never be happy in a traditional job. I hate fluorescent lights. I detest working in groups. While I can get interested in just about anything, nothing interests me enough for it to be a full-time career. Also -- and, to me, this is no small thing -- the smell of office carpet makes me existentially depressed.

So I became a freelancer -- thus joining the growing armada of the self-employed who sit at the same cafe table every day and thrust their business cards in your face during casual conversation. For the most part, it is a satisfying existence, a life of freedom and flexibility and almost no personal connection to "The Office." Then there are days when the clock slips past noon, but I haven't been outside, I haven't spoken to another human being, and I start to wonder if I'm going to wake up one morning when I'm 70 and regret never having owned a pantsuit.

That was the sort of mood I was in on April 14 of last year, when I took out the tax forms I'd picked up at the library and started trying to wade through my finances. I was still wearing the clothes I'd fallen asleep in the night before and now was facing a floor covered with 1099s, a few W-2s, and those pesky "estimated tax payment" envelopes that I never remembered to send in.

About eight hours later, I was still sitting in my room and the sun was going down. I had reached my yearly tax breaking point, the moment each April when I realize that, while they are technically written in English, I have no idea what any of the documents I am reading actually mean. I had, however, discovered for the umpteenth time that not sending in quarterly tax payments meant I owed the government interest, that I had to pay an additional 15 percent in self-employment tax (the way the government collects Social Security and Medicare/Medicaid payments from the self-employed), and that I hadn't kept good enough track of my receipts. Taxes are hard for everyone -- but for the freelancer, they're a special kind of hell, one where the devil sips martinis as you weep in the corner, struggling through your Schedule C.

That's why I decided to get a handle on the noncreative side of my life -- not just my taxes, but on all the mounting challenges of being my own boss. What was the smartest way to plan for retirement? What were the best resources for health insurance? How could I, starved for human contact, avoid leaping on my fiancé like a puppy every time he walked in the door? I wanted to better manage both my finances and emotions -- and reach a stage where bouts of depression and frustration came less frequently than my paychecks.

In the past year, I've managed to turn around my situation. And so, on this tax day -- which is a New Year's of sorts (though with fewer party hats and much more paperwork) -- I offer you a list of tips to make the practical, financial and emotional sides of freelancing more manageable. Some of it may seem obvious. Some of it may seem too wonky and technical. But if one poor freelancer opens an IRA as the result of this story, then I'll have done my job.

1. Get a tax advisor. These lovely people have chosen to read IRS documents as a full-time career -- take advantage of this bizarre miscalculation. Not only can they save you more money in taxes than they charge in fees, but hiring one means you will never, ever have to figure out the part of the 4562 Depreciation and Amortization form that asks you to calculate your special allowance for qualified Gulf Opportunity Zone property placed in service during the tax year and used more than 50 percent in a qualified business use.

Even if you feel the need to do your own taxes (do you also like walking across hot coals and curling up on a bed of stinging nettles?) you can still benefit from a one-time consultation. Pick an advisor who works with other people in your field and set up an appointment soon -- like, this April.

2. Set up a different bank account for your business earnings. And use a separate credit card -- which you pay for with your business account -- for business and healthcare expenses. This makes it much easier to keep track of your cash flow. I did this by opening a linked account with my normal bank account and then signing up for a JetBlue credit card -- which makes me feel like every time I'm buying staples (deductible!), I'm getting one step closer to a vacation. Or, at the very least, five free hours of DirecTV.

3. Pay your taxes quarterly. The bastards charge interest.

4. Set aside a regular percentage of your income -- enough for state and federal -- into a tax fund that you do not touch. Then tack on an extra 15 percent for the self-employment tax. Then have a friend slap you in the face, just in case you are not already hurting enough.

5. Do not wear your pajamas after noon. If regular workers can brave 9 a.m. traffic, then you can change your underwear by lunchtime.

6. Build in rewards. To quote a friend: "Do not get into the habit of drinking beer with lunch. At the same time, you should sometimes drink beer with lunch, because that is one of the reasons you are self-employed in the first place." His advice isn't just about alcohol -- though I did have a ginger-tini with lunch the other day that made me feel everything was right with the world. The point is that you need to build in rewards for yourself -- rewards that take advantage of being your own boss. Go for a walk in the middle of the day. Watch "Oprah." Take an afternoon off and see a movie. At the same time, though, make sure to set limits, so you don't cross the line from self-employed to unemployed. Some activities might be such time sucks that you need to outlaw them completely. "My downfall was television," one former freelancer told me. "How much television could I watch in the afternoon? Eventually, the answer to this question was 'none.'"

7. Exercise. This helps your brain and your body, but more important, it gets you out of the house. I realize that it sounds a little sad to say that you have "spent time with people" when in fact you have attended an aerobics class with strangers, but trust me. Friday morning cardio hip-hop has changed my life.

8. Take a shower. At least every other day.

Next page: How I saved $2,000 on this year's taxes