Hey, everybody ... it's tax time! Like I have to remind you. If all the sealed envelopes stamped "Important Tax Information Enclosed" you've been getting in the mail haven't tipped you off, then surely the stacks of TurboTax software piled up at the grocery store check-out lane have. And Spies are, unfortunately, not immune to that seasonal malaise. Particularly not freelance Spies, like me, who don't have the benefit of automatic withholding to insure that they have enough money set aside to pay their taxes.
Now that I have embarked on my exciting and lucrative (no snide comments from the peanut gallery, please) career as a freelance writer and science communication consultant, I have left behind the world of department business offices, administrative assistants, and payroll managers. Sure, that sounds great at first, but what it really means is that I have to be my own business officer, administrative assistant, and payroll manager. And I have to do my own taxes. HELP! I learned a lot of things in graduate school, but income tax law wasn't one of them.
When I first realized that I was going to be managing the finances of my one-person independent contracting business, I did what every level-headed person does in stressful situations: I panicked! No way was I getting into that fiscal snake pit! Forget this dream of freelancing, I'm going to work in Dilbert-land where everything is taken care of for me! I'll live in a cubical and develop a nihilistic sense of humor. I'll abide by the dress code, even on casual Friday. Anything, even oppressive and demoralizing office politics, is better than learning how to manage my own finances.
After the heart palpitations subsided, it occurred to me that I did know someone who understands finances: Dick, my accountant-in-law. By the way, I don't call him "Dick" to subtly convey my dislike for accountants by using an invented pejorative name; his name really is Dick.
And how exactly did I come to have an accountant? Well, ever since my wife was born, she has been a shareholder in her family's business, which greatly complicates her income tax "situation." So she uses the family accountant to prepare her taxes. After we married, I became a member of both the family and the business. And I had acquired an accountant-in-law. So while my graduate student friends were having Tax Night video-and-pizza parties and racing to the post office to beat the midnight deadline, I was snug in my bed dreaming of my tax refund check.
Back when I was working in different universities around the world, my relationship with Dick was pretty superficial. I received a (small) salary made smaller by substantial state and federal income tax withholding. At the end of every fiscal year, the government would send me a W2 form stating exactly how much money they had withheld, which I dutifully forwarded to Dick. Dick would work his magic and in a couple of months a (small) refund arrived in the mail. The whole process was pretty simple, and I always felt that I could have done it myself. My accountant-in-law was merely a timesaving extravagance.
But now, I needed help. Professional help. I called Dick and set up an appointment. And when the time came, I dragged myself down to his office.
Based upon my extensive study of a large sample of accountants (one), I believe that Dick is a quintessential accountant. His hair is gray and thinning. He wears gray flannel pants, blue shirts, and gold-rimmed glasses. His office is all wood, brass, and leather. And he has a gift for explaining finances in simple terms without being condescending. I was so grateful for the last trait that I forgave him the others.
He also has a philosophy of accounting: Your income tax return is just your first offer to the government. If they refuse and audit you, then you negotiate. If they accept, your offer was probably too high. Of course, that might be more of an attitude than a philosophy, but I still like it.
It turns out that the tax laws governing freelancers are pretty simple. Open both a checking and a savings account for your business. Every time you receive a check, deposit one-third in the savings account and two-thirds in the checking account. Pay all your business expenses out of the checking account and save every receipt. Keep records of every business-related mile you drive. (You can deduct 32.5 cents per mile from your taxable income.) At the end of the year, send the mileage diary, all the receipts, and the contents of your savings account to the Internal Revenue Service (IRS). That's it.
If I followed these instructions judiciously, Dick assured me, I would probably escape audits and imprisonment. And even if I did wind up in prison, it would be a nice white-collar prison, with a golf course. Too bad I don't play golf.
To make sure that I understood everything he had told me, Dick gave me the "Can-you-deduct-the-trip-mileage?" quiz. First he asked, "On Monday, you drive to a client's office to deliver a finished project. Can you deduct the mileage?" Knowing that Dick would be responsible for defending me against the IRS in the event of an audit, I wanted to be sure to convince him of my competence, or at least persuade him that I wasn't totally incompetent. So I answered with a question. "Yes?"
"Right. Now suppose that on Wednesday you drive to the office supply store to buy paper clips. Can you deduct the mileage?"
Gaining confidence, but still not confident, I repeated, "Yes?"
"Right again. On Friday, you drive to a lunch appointment with a client. Can you deduct the mileage?"
"Yes." This wasn't so hard.
"Right-o, and don't forget to save the receipt for the lunch; you can deduct that, too. Next question. On Saturday, you drive to the library to look up information for your current project. Can you deduct the mileage?"
"Yes!" I was rockin' now.
"Exactly!" He was getting excited, too; I was a model student. "Now for the last question. On Sunday, you drive your wife to her tennis lesson. Can you deduct it?"
I jumped up, thrust my arms triumphantly into the air, and yelled, "NO!"
Dick smiled, looked at me over the top of his wire frames, and said, "Congratulations, you pass."
Before I left his office, and because I had paid for an hour and used up only 40 minutes, Dick gave me one last piece of advice. As a freelancer, my clients will generally set the price for my services, usually in the form of an hourly wage. The real money, Dick advised me, comes when you can set the price for your products. As an example, he told me about a client who sold cockatiels out of his garage. Over the years, this client became something of an expert on the care and feeding of cockatiels, and he began writing a newsletter, which he sold to other cockatiel lovers. As word spread through the community of cockatiel cognoscenti, his subscription list grew and grew. It grew so large that by the time he retired he was selling 29,000 subscriptions a year. At $29 each, that newsletter had become a very lucrative side business.
I left our meeting feeling much more secure in my decision to go freelance, and since then I have even learned to enjoy handling my own money. And if things keep going as they have been, I won't have to worry about income taxes. After buying a new computer, stocking my office, putting gas in the car, and paying my accountant's hourly fee, my expenses far exceed my income. Maybe I'd better go out and buy myself a cockatiel.
The Spy is a scientist living and job-searching somewhere in the Western half of the United States.