Advising the Self-Employed
Tax pros can help freelancers
November 19, 2013
The economy has thrown tens of thousands of taxpayers into a new category of employment as contract, or freelance, workers -- and they could use some advice from tax professionals.
“Many of my clients have lost their jobs and because of their age -- usually in their 50s and 60s -- they are having difficulty finding new employment. Some of these clients have decided to become self-employed in the same field, usually as consultants. One of their main concerns is paying for health insurance until they are eligible for Medicare,” said Stephen DeFilippis, an EA at DeFilippis Financial Group, in Wheaton, Ill.
As companies rein in the costs of health care benefits and advanced professional salaries, many workers who thought they’d be clocking regular hours in the prime of their earning and benefits years instead flounder in what is essentially a freelance work world.
“We do see a lot of clients 50-plus who are now forced into freelance, contract or other self-employment because of the lack of job opportunities,” said John Walker, an EA at J. Walker & Co. LLC, in Concord, N.H. “These are often professional, technical or managerial people who’ve been laid off, downsized or their industry has simply collapsed or moved offshore.”
“The advice that we give usually has to do with being self-employed for the first time in their lives,” said Steven Hanson, a CPA with Minnesota-based Piehl, Hanson, Beckman PA and president of the National Society of Accountants. “Discussions of the applicable tax laws, recordkeeping, estimated tax obligations, what is deductible and what is not, things like that.”
New worries
“Their No. 1 concern is trying to make some money,” said Walker, “but they’re unprepared for and often overwhelmed by the recordkeeping necessary for any self-employed person. It’s part of any business but one they usually didn’t have to deal with. Their prior employers had accounting and HR departments to handle all that detail stuff.”
Hanson said such clients’ concerns are twofold: “First, if this is their main source of income, can they make enough to make a living?” he said. “This is first on their minds if they have no other source of income or if they have left a more secure position as an employee. The other concern most have is, how do they get started, do they need ID numbers, registration or some obligation, and then just how to keep track of their income, expenses and other reporting or record keeping obligations.”
Another group
Contract workers also come from other demographics. Cynthia Jeanguenat, EA with Horizons Unlimited Tax & Business Services in Virginia Beach, Va., has a few clients working as independent contractors after retiring from previous jobs.
“I advise them the same way as other new business people: how to keep records, what type of tax entity they might consider, what are the filing requirements and licensing procedures, will they be hiring employees or other independent contractors, and the like,” she said. “I also talk to them about contributing to a retirement plan like a SEP IRA, for example.”
“Since they’ve been an employee nearly all of their working career, the challenges of being an independent contractor are somewhat frightening to them,” added Delmar Gillette of Delmar C. Gillette Economic Planning Services Inc. in Newport News, Va. “What about Social Security taxes? What expenses are part of their tax return? ‘What do you mean I have to make estimated payments?’”
For perhaps the first time in their lives, these clients get letters from the IRS saying they’ve under-reported income or overstated deductions -- frightening and confusing and swiftly draining the fun out of what clients hoped was going to be their financial salvation.
“The clients in this age group are concerned about doing everything right and staying out of trouble with any taxing authority, so it’s important to provide them with the right information because they generally don’t like paying large amounts of money at tax time. We also calculate quarterly estimated taxes for them if needed,” Jeanguenat said.
“Many of my clients have lost their jobs and because of their age -- usually in their 50s and 60s -- they are having difficulty finding new employment. Some of these clients have decided to become self-employed in the same field, usually as consultants. One of their main concerns is paying for health insurance until they are eligible for Medicare,” said Stephen DeFilippis, an EA at DeFilippis Financial Group, in Wheaton, Ill.
As companies rein in the costs of health care benefits and advanced professional salaries, many workers who thought they’d be clocking regular hours in the prime of their earning and benefits years instead flounder in what is essentially a freelance work world.
“We do see a lot of clients 50-plus who are now forced into freelance, contract or other self-employment because of the lack of job opportunities,” said John Walker, an EA at J. Walker & Co. LLC, in Concord, N.H. “These are often professional, technical or managerial people who’ve been laid off, downsized or their industry has simply collapsed or moved offshore.”
“The advice that we give usually has to do with being self-employed for the first time in their lives,” said Steven Hanson, a CPA with Minnesota-based Piehl, Hanson, Beckman PA and president of the National Society of Accountants. “Discussions of the applicable tax laws, recordkeeping, estimated tax obligations, what is deductible and what is not, things like that.”
New worries
“Their No. 1 concern is trying to make some money,” said Walker, “but they’re unprepared for and often overwhelmed by the recordkeeping necessary for any self-employed person. It’s part of any business but one they usually didn’t have to deal with. Their prior employers had accounting and HR departments to handle all that detail stuff.”
Hanson said such clients’ concerns are twofold: “First, if this is their main source of income, can they make enough to make a living?” he said. “This is first on their minds if they have no other source of income or if they have left a more secure position as an employee. The other concern most have is, how do they get started, do they need ID numbers, registration or some obligation, and then just how to keep track of their income, expenses and other reporting or record keeping obligations.”
Another group
Contract workers also come from other demographics. Cynthia Jeanguenat, EA with Horizons Unlimited Tax & Business Services in Virginia Beach, Va., has a few clients working as independent contractors after retiring from previous jobs.
“I advise them the same way as other new business people: how to keep records, what type of tax entity they might consider, what are the filing requirements and licensing procedures, will they be hiring employees or other independent contractors, and the like,” she said. “I also talk to them about contributing to a retirement plan like a SEP IRA, for example.”
“Since they’ve been an employee nearly all of their working career, the challenges of being an independent contractor are somewhat frightening to them,” added Delmar Gillette of Delmar C. Gillette Economic Planning Services Inc. in Newport News, Va. “What about Social Security taxes? What expenses are part of their tax return? ‘What do you mean I have to make estimated payments?’”
For perhaps the first time in their lives, these clients get letters from the IRS saying they’ve under-reported income or overstated deductions -- frightening and confusing and swiftly draining the fun out of what clients hoped was going to be their financial salvation.
“The clients in this age group are concerned about doing everything right and staying out of trouble with any taxing authority, so it’s important to provide them with the right information because they generally don’t like paying large amounts of money at tax time. We also calculate quarterly estimated taxes for them if needed,” Jeanguenat said.
2 Comments
Here's a radical idea - make the SE taxes on net business income below a certain level (maybe $20-25,000) voluntary. The taxpayer can choose to accept a lower level of Social Security/Medicare benefits in the future in exchange for being able to eat in the present. After all, SSA certainly has the record-keeping ability to record the actual amount received from employees/employers, and calculate benefits based on that amount, not just gross earnings. And 15% of $25,000 is $3,750 - a significant chunk of money for someone who only cleared $25,000 for the year, and often just not payable by the taxpayer in that situation.