Thanks for mentioning this! I had no idea about the self-employment tax being that high. Do I get any credit for the social security/medicare taxes I'm already paying through my W2 job? And for the mileage deduction, does driving to client meetings count?

There's a cap on Social Security tax (not Medicare) - if your W2 job already withholds the max Social Security tax ($9,932 for 2023, which happens at $160,200 of income), then you won't owe additional Social Security tax on your freelance income, just the Medicare portion. Driving to client meetings absolutely counts as deductible business mileage! Keep a log with dates, starting/ending mileage, and purpose of each trip. Commuting to a regular workplace isn't deductible, but since your freelance clients aren't a regular workplace, those trips qualify. You can also deduct trips to buy business supplies, attend work-related conferences, etc.

This is the best advice! I started doing this last year and it's been amazing for keeping things organized. I also set up a separate checking account for all my freelance income. My accountant was super impressed with how clean my books were.

Wait, I thought scholarships used for room and board counted as earned income, not unearned? This is why tax stuff makes my head explode. Can anyone clarify this? I might have filed wrong last year.

That's a common confusion. For general tax purposes, taxable scholarships (amounts used for room, board, etc.) are considered earned income. However, specifically for the Form 8615 "kiddie tax" rules, these same taxable scholarships are counted as unearned income when determining if the child meets the $2,600 threshold. It's frustrating that the same money is classified differently depending on which tax rule you're looking at. For filing requirement purposes, taxable scholarships are earned income, but for kiddie tax purposes, they're unearned income. This dual classification is exactly why so many people get confused about Form 8615.

I used TurboTax for my son's return with almost the exact same situation. The software asked if he was required to file (not if he wanted to file, but if he was required). I answered no, and it correctly didn't include Form 8615. Just make sure you answer the "required to file" question accurately based on the thresholds, not based on whether you're actually filing. TurboTax also correctly included the taxable scholarship as income but didn't trigger the kiddie tax form since he wasn't required to file.

Do you have any documentation on this approach? I've never heard of being able to include coffee as part of home office expenses and want to make sure I don't get audited.

I don't have official documentation, just what my CPA advised me. The key is not to list "coffee" as a line item but to incorporate reasonable office supplies/consumables into your overall home office deduction. The regular home office deduction already accounts for things like this. My approach is just making sure that my home office is legitimate (dedicated space, regular use for business, etc.) and then taking the standard deduction for it. I don't specifically break out coffee as a separate expense - it's just considered part of the overall home office usage.

This is really good advice that people overlook. What was your experience with the audit like? Did they focus on small deductions or bigger issues?

Are you in California by any chance? That $800 minimum tax is brutal. Do you think the liability protection is worth that annual fee for a small side business making maybe $15k a year?

Yep, California's $800 LLC tax is exactly what I was referring to! For a business only making $15k annually, I personally don't think the LLC is worth it unless you're in a high-liability industry. That $800 represents over 5% of your gross revenue before any other expenses. Many small business owners don't realize they can get decent liability protection through good business insurance policies without the LLC structure and fees. A general liability policy might only cost $500-700 annually compared to the $800 state fee plus LLC formation costs.

You can have a single LLC that covers multiple business activities if you want. On your Schedule C, you'd either need to: 1) file separate Schedule Cs for each substantially different business activity or 2) use the primary business code that represents your main activity. For tax purposes, it's more about properly categorizing and reporting the different income streams than about having multiple LLCs.

Thank you for mentioning potential refunds! I hadn't even considered that possibility. Do you know if receiving a refund for one year could offset what I might owe for other years automatically? And what exactly is a CP2000 notice? Is that something I should be worried about?

The IRS will generally apply any refunds to outstanding tax debts automatically. So yes, if you're due a refund for 2022 but owe for 2018, they'll typically apply that refund to reduce your 2018 balance. This happens automatically in most cases. A CP2000 is a notice of proposed adjustment to your tax return. It basically means "we think you didn't report all your income." It's not an audit, but it means the IRS identified a discrepancy between what you reported and what they have on record from W-2s, 1099s, etc. Not something to panic about, but you'll need to either agree with their assessment or provide documentation showing why they're incorrect.

Plus if you lived in different states during those years you might need to file partial year returns for each state! I had to file in 3 different states for one tax year when I moved around for work. Total nightmare.