Tax Time Preparation for Freelance and Contract Attorneys in 2024

Written in collaboration with Domenic Serratore, Principal, Serratore Associates, LLC

Whether 2023 was your first year engaging in contract legal work or your 30th, you don’t want to wait until Tax Day to start thinking about the implications of your contract work on your taxes. Contract roles often have more freedom and flexibility, but often they also carry a little more administrative burden for the workers, so embrace those entrepreneurial vibes and kick off your tax season early to save yourself unpleasant surprises later. April 15 will be here before you know it, but we've invited Domenic Serratore of Serratore Associates, LLC to help us give you a timely guide to tax preparation for freelance and contract attorneys.

Collect your 1099s and W2s.

Over the course of the past year, you may have worked for several clients either as a W-2 employee or on a 1099 basis. Make a list of all the clients you've serviced, noting how you were paid. You should receive your statement of income in the mail within the first few weeks of the new year (all statements must be postmarked no later than January 31, 2024).

Use the list as a checklist and confirm when you have received your statement from each one. If one is missing come early March, reach out to obtain a copy. Please remember that new IRS regulations mandate that a 1099 be issued for amounts paid over $600. As such, you may get a 1099 from a company that you may have forgotten about, including selling some of your personal items.

While a W2 is standard across the board, the 1099 statements you receive may vary. A 1099-NEC is usually sent by companies that you have contracted your time. All 1099s are electronically filed with the IRS and your state of residence. As a result, it's imperative that all income is reported, otherwise, you will get a CP2000 notification from the IRS that will include interest and penalties. States that have income tax will also follow up in a similar fashion.

Itemize your expenses.

If you have worked mainly as a freelance or contract attorney accepting 1099s, then you likely have business-related expenses, including taxi and Uber rides, business meals, self-paid healthcare and/or malpractice insurance, coffee meetings, printer cartridges, research software (like Lexis Nexis or Westlaw), etc.

Hot Tip: Expecting to freelance again in 2024? Set up a business bank account and credit card to easily track all your deductible expenses.

• Check your credit card and bank statements to see which purchases you have made that were necessary for business.
• Did you have to travel to a meeting that required staying in a hotel? That hotel stay would be considered an expense as would the mileage driven to reach that destination. Did you take your client to lunch? That, too, is a business-related expense. Please be aware that most business meals are deductible at 50% and may be limited based on their purpose, as such detailed record-keeping is imperative.
• Also, make a list of any professional development courses you have taken that have helped you improve a skill directly related to your job. Books, tuition, CLEs, supplies and transportation costs may all be deductible. As a side note, if the course is completed at an accredited tertiary educational institution, you may qualify for the Lifetime Learning Credit. As this is a credit rather than a deduction against your income, it may be more beneficial to claim the Lifetime Learning Credit rather than taking a business deduction. Your tax professional can provide the best course of action in this instance.
• Many freelancers establish a dedicated home office to complete their work in. A home office must be the principal location of your business or a place where you regularly meet with clients, and you must use the area exclusively for your business. (Working from your dining room table does not count.) If you are simply working remotely for a business, the home office deduction is not available for you.
• Saving for retirement, such as a Self-Employed Pension (SEP), a simple 401K, etc., are other deductions that you may consider to reduce your taxable income while saving for retirement.

Review your tax status.

Hot Tip: It is important that if paying online, you are on the IRS.gov site. There are many unaffiliated third-party sites such as IRS.com that charge a fee (sometimes substantial) to make a payment; making a payment via IRS.gov does not incur any fees.

As a freelancer operating as a sole proprietor or limited liability corporation (LLC), you will need to pay self-employment taxes. Ideally, you will make quarterly payments. Self-employment tax (SE) applies to net earnings of $400 or more. These taxes are paid at a rate of 15.3%, which is comprised of 12.4% for Social Security and 2.9% for Medicare, with your various 1099 forms documenting income types. Keep track of the amounts you have paid each quarter so you can submit this information when preparing your annual tax return. Keep in mind if you are being paid as a W-2 employee, these taxes will have been taken out by the organization and you do not need to report this income with your self-employment taxes.

Estimated payment can be made online via IRS.gov/payments. A confirmation email is sent when payments are made via the IRS online payment portal.

If you have a balance due at the end as a result of not making estimated payments, you will be subject to an underpayment penalty on the balance due. This is typically calculated at time of filing the return; however, the IRS can adjust it as needed.

Looking forward to 2024, if you anticipate making over a certain income level, you may want to consider making an election to have your business treated as an S-Corp. An S-Corp allows you to separate the entity from the owner. You are required to pay yourself a reasonable salary as an employee and not be subjected to self-employment taxes. Instead, you would have social security and Medicare taxes taken out of your salary amount and the remaining profit for the business would be reported on a separate form.

Even if an S-Corp does not make sense for your business, you still may want to consider forming an LLC in order to protect your personal assets from liability in the event of a lawsuit or debt collection.

Search for tax credits.

The IRS offers tax credits that can help reduce your income taxes. You may qualify for the Earned Income Tax Credit (EIC) if you file jointly, have at least three dependents (a total family of five) and made less than $63,398 in 2023. The income limits to qualify for the EIC are lower for other variations such as single taxpayers with no dependents. Note: you must be between the ages of 25 to 65 to claim the EIC regardless of income.

Premium tax credits may also be available if you purchase insurance on the federal or any state exchange. Other credits such as the previously discussed Lifetime Learning Credit, child tax credit, and dependent care credits may also be available. Some or all these deductions may also be available in your individual state.

Keep in mind this guide is intended to give you a general overview of taxes for freelancers, but we recommend that all legal freelancers engage a tax professional for preparation and advice. A tax professional can help you determine your deductible expenses and work through the best business structure for you.

We hope that this guide helps you navigate this tax season with confidence!