Elance Blog

Ask Sarah: Volume 1

From time to time Sarah will answer Elancers’ questions rather than write a blog. If you have a question related to freelancing—and in particular, to Elancing—please feel free to visit the Sarah's Corner page of her website.

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Taxes Don’t Have to Be the Bane of Your Existence.

Because it’s that time of year when taxes are on the minds of U.S. taxpayers, the first two questions are related to withholdings and retirement, and they come from Cathy H.

Question number 1: “How much should Elancers set aside to pay their annual and/or quarterly taxes? Does this number change if they are single/married/divorced/head of household?”

Question number 2: “How much should Elancers set aside for their retirement? What do you recommend Elancers invest in to have some retirement? IRAs? Others?”

Here to answer these questions is fellow Elancer Claude Campbell, CPA, MBA and FCCA of Campbell Andrew LLC. Campbell Andrew LLC provides accounting advisory and tax services to individuals and small businesses, including not-for-profit organizations, Estates and Trusts. They provide a comprehensive payroll solution along with complete bookkeeping, accounting and tax services. To learn more about their services, please visit their website

Answer number 1: “The US income tax system is a pay-as-you-earn system. For individuals who are employed, this is achieved through periodic tax withholding by the employer, who remits the taxes to the IRS and the State, typically at each pay date.

Self-employed individuals such as Elancers are required to make—at a minimum—quarterly estimated tax payments to satisfy this requirement. Two key factors in determining the amount of such estimated payments are the level of income and filing status.

Let’s assume for a moment that you earn $50,000 as an Elancer, which is your entire income for the year, and your filing status is Single, with no dependents, and you will take the standard deduction. Your federal tax liability would be approximately $12,113, or 24 percent of your income, which includes self-employment taxes (which is the payroll tax equivalent), of approximately $7,000.

If your filing status is Married filing Jointly, with all other factors remaining the same, your federal tax liability would be approximately $10,144 or 20.2 percent of your income. Your tax liability will therefore change according to your filing status. In this scenario, the Single filing status will attract the highest level of tax liability; a divorced individual with no dependents files as single. Unless you live in one of the few states (for example, Florida) that do not have a personal income tax regime, you will also have a state tax liability. A good rule of thumb is to set aside between 25 percent and 32 percent of your gross income, up to earnings of approximately $250,000, for federal taxes, and 4 percent to 7 percent for state taxes.”

Answer number 2: “The IRS places limits on annual contributions to retirement plans. The limit on contributions to an Individual Retirement Arrangement (IRA) is $5,500 for 2014 and 2015. For people aged 50 and over, there is an additional catch-up contribution limit of $1,000.

Contribution limits for Savings Incentive Match Plan for Employees (SIMPLE) retirement accounts is $12,000 for 2014 and $12,500 for 2015. A SIMPLE plan would be relevant for Elancers who operate under a registered business umbrella such as an LLC or Partnership.

While I cannot provide specific investment advice, given that I am not a Registered Investment Advisor, IRAs provide a good medium through which one can invest successfully for retirement.”

Hourly vs. Fixed—Almost as Old as the Chicken and Egg Debate.

Question number 3 comes from Samuel J., who asks: “Sarah, what is your opinion about fixed price jobs versus hourly jobs? Do you have a strong preference one way or another? Can you walk us through some pros and cons of each?”

Answer number 3: I don’t have a strong preference either way. Although, again, this is a rather contentious debate, based on my experience it all depends on two factors:

The job’s deliverables

The client’s inclination toward either scope creep or endless revision requests

The Job’s Deliverables.

If your client and you have agreed to a job with very specific deliverables—for example, to edit a 50,000-word manuscript, create a logo, design a website or create an Access database—fixed price is appropriate.

For this to work well, it is imperative you have everything you need before you start working. Spend some time looking over everything you’ve received and then offer your prospective client a price. Think through what will go into the job, including hours spent thinking and organizing as well as the execution and completion of the job. Multiply this by your hourly rate (or, if you prefer, your per-word rate), and that’s how a fixed price is, or should be, determined.

Conversely, if the deliverables are not so easily defined or it’s a long-term job and the deliverables change week-to-week, hourly would be more appropriate.

Example of a Job Made for Fixed Price.

Among our long-term clients, we have two for whom we deliver quite a bit of work each week. In one case, the deliverables are the same: a set number of articles and translations. For her we have a fixed price job that runs the length of the year, which is then renegotiated for the following year. On the occasions in which she asks us to add another set number of articles, translations or copywriting, I figure out what will go into the job and create a one-off fixed price job.

Example of a Job Perfect for Hourly.

For another client, we do a variety of tasks in a given week. One week we could deliver seven infographics, three articles, perform some research and code something on one of his websites. Another week we may deliver the same number of infographics, but there may not be any research or coding to do; instead, we might deliver ten articles and track a campaign using Infusionsoft.

Because our deliverables change week-to-week, for this client it’s appropriate to have three different hourly jobs going (across three different categories: Admin, Writing and Design). If we were doing a fixed price job with this client, my head would explode as I got everyone on my team to submit a time sheet for their hours and then I created a new milestone for each job that covered the deliverables.

I’d have to wait for my client to first check into Elance and approve the new milestone and then ask him to check back in once I have submitted a completed status report so he could first fund and then release escrow. That’s a lot of extra work for both my client and me.

In this case hourly is perfect for both him and me. And you needn’t manage a team fielding multiple time sheets for this to work, either. The scenario above can apply to one person or a team of 20+ like mine.

Scope Creep.

Sometimes clients know going into a project that they have every intention on tacking on requests after the deliverables are defined. There are just people like this in the world, and they can’t help themselves.

Some clients have the best intentions. Perhaps they are the type who sees things from a high-level perspective—meaning they’re not very detailed oriented. As a project is handed off to a freelancer, a client might remember something else that wasn’t initially discussed and agreed upon.

It’s up to you—the freelancer—to ensure that whether it’s intentional or just a case of dealing with an “absent-minded professor” type, you take care of yourself by either setting boundaries and pushing back or by protecting your time.

My preference is always to be flexible and just make sure the client knows—in a professional way, of course—that it will cost him or her extra.

If it’s a one-time lapse, add a new milestone to the job. If it’s something that’s clearly a chronic problem, I suggest you do an hourly job.

Endless Revision Requests.

It’s not uncommon for clients to request revisions. Without the benefit of being inside your client’s head and knowing exactly what he or she wants down to the last detail, you’re bound to miss something or not do the job to specification the first time. By no means is this a reflection of your work ethic or ability to comprehend things. The more you work with this client, the less often this should happen because you should get to a point where you can anticipate his or her needs—and in some instances, better than he or she can.

In this circumstance, just make the revision and send it back to the client. No harm, no foul.

However, there are clients who are so exacting—and I don’t say this in the most flattering way—that they’ll send back work three, four and five times for revisions. In some cases the fifth request contradicts or undoes a revision made previously.

This client exists, and he or she is extremely difficult to please. My personal preference is not to work with clients like this because the frustration factor isn’t worth it—no matter how much the job is worth. On the other hand, there’s someone for everyone, and there is an Elancer who’s perfect for this exacting client.

This Elancer sets extremely clear boundaries and also ensures she or he is paid by the hour and charges for every single revision.

One thing I advise all freelancers to do prior to accepting a job is to have a phone conversation. This is the opportunity to find out about all the job’s deliverables and the client’s personality (listen not just for what’s said, but also what’s not being said).

I liken that call to being on a first date with someone. People will tell you everything you need to know about them; you just need to be listening. Think back to how many times you ignored a “sneaking suspicion,” and went against your better judgment, only to find the client did exactly what he or she said would happen in that phone call.

A phone call doesn’t cure a prospective client of scope creep or having an exacting nature. It just ensures you are armed with the decision to either walk away or charge by the hour and not feel as though he or she is taking you for granted.

The final question comes from Gabriela K. She asks, “Hi Sarah, do you think it's possible to be a professional writer, even not being a native speaker? I live in the U.S., but am originally from Brazil. I love to write and I hope to make it my sole source of income.”

My answer: Rather than guess whether Gabriela should consider writing in another language, I engaged her in a back and forth email exchange. After several emails, I concluded that had she not told me she wasn’t born and raised speaking American English, I’d never have known. Her English was truly fluid. I also read her blog, which gave me further confirmation she writes very well in English.

Because it’s not really my nature to discourage someone from following her dreams—regardless how practical or impractical I think they may be—I did encourage her to keep writing in English and told her I really liked her writing style. I imagine as she gets the nerve to write more for money, others, too, will like her style.

And Gabriela is far from alone in her desire to write in a language that isn’t her mother tongue. Here is a very short list of some people who made/have made their living as writers in a language that wasn’t/isn’t their mother tongue.

Joseph Conrad (1857-1924)

A Polish writer who spoke Polish, German, Latin, French and Greek, Conrad left what is now considered the Ukraine in 1874. He was 17 at the time. In his late 20s he decided to settle in England, where he penned novels in English, among them the controversial yet beautifully written Heart of Darkness.

Vladimir Nabokov (1899-1977)

Born and raised in Russia, Nabokov was 20 when he and his parents moved to England after the Bolshevik Revolution. He also lived in Germany, France and the United States. Speaking three languages—French, Russian and English—Nabokov wrote ten novels in Russian and nine in English, as well as poetry and short stories in both languages. Perhaps his most famous book, Lolita, was written in English.

Anna-Kazumi Stahl (1962- )

Born in Louisiana to a Japanese mother and a German-American father, Stahl has lived in Germany and the U.S., and she now lives in Argentina. She speaks English and Spanish, although she writes in Spanish. In 2002, Stahl’s first novel Flores de un sólo día, which means Flowers One Day, was published.

Can anyone write in a language that’s not his or her mother tongue? It should go without saying that if this is something you desire to do, you’ll want to be completely fluent in that language. It doesn’t hurt to have lived in that country, because apart from and being able to write in another language, part of what makes a writer an artist is being able to communicate the colloquialisms and “famous sayings” so everything flows. It offers more than facts, but context as well.

Do you have another perspective on the advice I offered to these three Elancers? If so, please comment below.

PS: Looking for more free Elance tips? I recommend Danny Margulies' Top 5 Elance Hacks.

Comments

Thank you for addressing my questions, Sarah!! :)

Hey Cathy,

You're so welcome! :)
Sarah

Very informative article as always, Sarah. I'm going to have to disagree with the initial headline, however; taxes are the bane of our existence and are likely to remain that way as long as corporate entities skirt the tax laws by registering in off-shore tax havens. Because they don't pay anything the rest of us are stuck paying more, regardless of whether or not we can actually afford it.

And its not as if the tax money they collect is being used to cover the costs of any real services, anyway. Most of that money goes to defense or to service the debt - so when we pay our taxes we freelancers are supplementing the war machine and the banking industry, not helping our fellow citizens feed their children or improve their lives.

Hi Nathan,

I certainly won't argue with you that the tax structure in many counties is unfair and puts average Joes and Janes at a severe disadvantage. Perhaps my headline is misleading. I didnt mean to imply it is fair and just. I guess I was trying to be clever by using that headline/subheader to suggest that while nobody loves paying taxes, as freelancers, it needn't be as complicated paying them as it appears to be. That's all. :)

Sarah

Yes, Sarah, you're right about that, it really isn't all that complicated, especially if you use an online tax preparation service. They do all the hard work for you and are programmed to fill out the necessary supplemental forms that freelancers need to file.

In the hope that Sarah indulges my going a bit off-track here, according to https://www.nationalpriorities.org/budget-basics/federal-budget-101/spen..., the portion of the federal budget going to defense is 16%, and to servicing the federal debt 6%. Thus the portion you seem to object to, @NJF_2012, is less than a quarter of the budget. Moreover, since the federal debt is due to spending on much more than just the military, I don't see why you'd single that out as something objectionable. Finally, the portions covering social security, medicare, health, labor, and unemployment, inarguably all intended to help our fellow citizens, take up fully 60% of the federal budget. Other categories helping taxpayers, including education, housing, transportation, etc., take up another 12-17% (depending on whether you include science and veterans benefits).

I understand that paying taxes is not a favorite thing for any of us. However, short of a majority of us agreeing on what we're willing to do without, taxes will not go down. To date, all tax complaints I've seen or heard can be boiled down to "I don't want to pay for X," where "X" is something the objector would cut because s/he doesn't benefit from it, or doesn't realize how s/he benefits from it.

As food for thought in this particular case, what would you expect the result would be if we did away with our armed forces? Do you believe the world would turn into the sort of place from Isaiah's prophecy, "The wolf shall dwell with the lamb, and the leopard shall lie down with the young goat, and the calf and the lion and the fattened calf together; and a little child shall lead them"? More likely, we'd be conquered by people who don't have our best interest at heart. By no means does this mean that every dollar we spend on the military is deployed in the most efficient manner possible, nor that we couldn't survive with a smaller military. However, neither you nor I have the expertise needed to determine by what fraction we could cut our defense budget without significant national security implications.

Hi Opher,

Absolutely I'll indulge you, if you'll indulge me. Forgive me, but I am lazy and so I hope you won't mind if I copy/paste the same comment I used in the Elance-oDesk Winners' Circle. :)

Thanks Opher,

Thank you, and I am glad you liked it. :) I always appreciate your support and encouragement.

I think it's impossible to discuss anything political or ideological without it breaking out into a brawl. I have learned this from experience. We're all deeply committed to our POV, which is obviously based on a a variety of factors:
- Our own experiences
- Our country's history (good, bad and downright ugly)
- Any religious and/or philosophical beliefs or lack thereof
- The political party we align ourselves with

And of course this all gets up there in our brains, mixes with our emotions and bam! Out those thoughts and feelings come and assuming there's another person on the other end to receive this, unless he or she feels exactly the way you do, Bam! Out his or her views come.

I give a great--mostly playful--fight on social media. I'd be lying through my teeth if I said I don't have some very deeply held beliefs--the same way you do, Nathan does and just about everyone else I know does.

I just don't, as the expression goes (and I'll give you the rated G version) "poop where I eat." You won't see me expressing any of those views where there are clients who can see them and make judgments based on them.

I'd be shocked if my beliefs resonate with my clients' views, and I'd equally shocked if they resonate with yours, Nathan's, even those of my own brothers.

All this to say that I have found it a waste of time to counter folks' opinions on hot button issues. Tempers flare, freelancers are fired, friendships are lost and judgments are made. I think I'd rather live in ignorance than risk any of that.

Okay, I do sometimes get opinionated on my own Facebook wall, but I have a few rules:
- No name calling, ever! Consequences are time outs or if chronic, defriending
- Respect at all times, no matter how much we disagree
- Have a ense of humor, life is really short. :)

I wrote the same to Nathan, by the way.

Cheers,
Sarah

That is fake/cheater client. I have complete his poster & flyes on time. But he didn't pay anthing not a single penny. He trying to making fools of freelancers. Everytime that guy making chages on projects. When everything is done he said you done nothing and I didn't pay you the money. That ctype of client just wasting the contractor time. That is really poor client on elance. Beware guys of that type of client. Even he chages his location like one from Ireland another from United States. Please he is totaly a scam. He will used you guys. Don't work with such kind of clients. I'm typing his some personal details may be useful for other freelancers. He want all work to be free without any cost.
He is using site like - elance, freelance, odesk other freelancing websites.

Name - Brian Doherty
Contact Name: john mcgillen
email - bdoherty754@gmail.com
Skype Id- bria_d98
Username: brian_d98
Location: 20 mounthawk manor cahersalee
tralee, kerry 000, Ireland

Location: United States
London, CA
Phone: +353-0862623738

PLEASE BEWARE FOR HIM. HE IS TOTALLY A SCAM.

Thank you, Sarah, for pulling together some professional information on taxes.

I have not yet committed to earning my whole income as a freelancer, so I do not make quarterly estimated payments, but I am now setting 28% of my eLance income aside for year-end combined (federal/state/municipal) tax purposes. This is a "ballpark" estimate based on what my primary employer withholds which, (without distortions like eLance income and some IRA withdrawals), usually resulted in a respectable refund. The idea is that the money set aside should compensate for the increase in income in all three jurisdictions.

Kudos to your secondary source for recognizing his limits in not being a RIA. I happen to know someone who is licensed in this area, (but is not an RIA yet either), and staying within legal limits like this shows he knows his field.

(BTW, Sarah, your mention of Joseph Conrad reminded me of my late grandfather reading "Lord Jim," one of Conrad's novels. That was quite a while ago, probably Nixon-era. I haven't read it myself, but your comments on Conrad's background have made me curious.)

Great article. I'm dealing with a client now who wants me to do an extensive rewrite on a 15K word story. I've just told him he can either A) pay me or B) reject the story and go find another freelancer. And this is after I submitted the original story two weeks ago. I will say the comments by his editor were extensive, but far too many were opinions.