When moonlighting turns into almost real money

Forum|Forum|7 years ago
July 16, 2018
3 replies
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At what point do I switch from putting money received for freelance work in my personal account, to tracking it separately as a business? I'm asking mainly for the sake of understanding taxes. Do I roll these into my personal taxes, or do I file separately? I suppose that makes it two questions.

Since March, I've earned a bit over $5,000 as a freelance editor. Most of it from a company that uses me as a freelance fill-in (and will be sending a 1099) and the other for a fiction author who uses me as a proofreader/editor (I don't know if she'll be sending out a 1099). I have a business license with the state of Washington.

A

Anonymous

Hey @DJayne,

There are many accountants here in the community who can provide a definitive answer, but since you've indicated that you will be filing a 1099 and have a business licence (which identifies business-only income and expenses), you've already sort of answered your own question :).

You should always separate business income from your personal equity that isn't related to your work. More than anything, when tax-time rolls around, you'll need to be able to identify what income came from what source. If you are making $2,000 a month aggregate, what part of that is from your regular 9-5 and what comes from your freelance work? And how much have you already taken out for taxes from each stream of income? If it's all mixed together, you won't be able to file your 1099 correctly.

EmilyCowan

Hey @DJayne - welcome to QB Community! This is a fantastic question :smileyhappy:

First of all, congrats on what sounds like your first 1099 (woot!). If you're receiving one, then you are considered an independent contractor by the state of Washington. Whether you'll be paying taxes on your income this year depends on whether you meet the state's $12,000 threshold and, if you've already racked up nearly $5,000 since March from your 1099-issuing client, then I'd say it's a strong possibility.)

Whether you're freelancing strictly as a side gig or hoping to build the business to full-time self-employment, separating out personal from professional funds now will save you a world of headache come tax time. But I'm no tax professional, so don't take my word for it! @Peter_G_Stone, @195937, @JenPM - any thoughts for DJayne on getting started?

(In the meantime, here are some great tips from QB Community member @lynda11_2 on managing self-employed taxes.)

So how did you end up freelancing this year? Was it a conscious choice to work for yourself or did an opportunity present itself that you just couldn't pass up?

DJayneAuthor

Thanks, EmilyC - That's a big help, especially the information about the break-point for having to file. I've kept separate records, but have deposited all of the income in my personal account. I'll start moving some back over to a business account to cover taxes, just in case.

The freelancing started after a layoff. It was a bit of "how can I supplement the unemployment checks?" and "how much could I make on my own?" The biggest part of my freelance income is from the company that laid me off (really nice folks, and the director was almost crying as he told me they couldn't keep me). They didn't have enough work to keep me as a full-time employee, but were going to have to find a freelancer to cover gaps, so I offered my services.

EmilyCowan

Thanks for sharing that, @DJayne! I've worked as a freelancer for many years and I totally get it. I'm glad you're on such good terms with your former employer (and is that how you landed the proofing gig for the fiction writer as well?).

One of the biggest adjustments for me was the transition to working from home - or at least not in a traditional office setting. I've found that working from home really suits me - LOL, maybe too much! - but it's not for everyone. How's that part going for you? How do you structure your time?

Peter_G_Stone

Hi @DJayne, great question! First off, @EmilyCowan and @196578 made some great points to guide you, and separating personal and business is a must whether you are freelancing or running your own business full time. It will make everything (especially come tax time) much easier for you.

If you already have a business license, it is clear this is not a hobby. You do not get a business license unless you are looking to gain a profit from your area of expertise. I suggest opening a separate bank account for your business. This will allow you to track your freelance income and expenses without intermingling income from your other job and personal expenses. If you do this, creating a Schedule C for your Form 1040 federal tax return and equivalent state return will be a painless process. Your income (loss) from this business will go on the "business income" line separate from your "wages" on the 1040.

Keep in mind no taxes are withheld on this income, so you will owe Uncle Sam SE Tax, which is 15.3%. The withholdings from your other job will help offset some SE Tax, so that is a plus! This is a very high-level view and you should consult with a tax advisor on specifics. Best of luck with your work!

DJayneAuthor

Thank you, Peter - that's very helpful and nicely concrete advice. I've been careful to track all of my freelance income, but have been mingling it right into the same account as my regular income. I'll change that going forward and "pay" myself out of the business account. I'll also, as previously mentioned, start moving some money into an account to pay taxes out of.

I got the license in 2015 when I picked up a very short contract that I was initially told was a w2 (and I negotiated it as such), but turned out to be a 1099 (and the stinkers wouldn't increase the rate, but I was desperate so took it). I've kept it active just in case.

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