Investment Coordination for Freelancers in Austin

No, and the line is worth drawing in the first sentence rather than burying it at the bottom. The Reed Corporation is a CPA and tax firm. We are not a registered investment adviser. We do not sell securities or manage portfolios, and we do not provide investment management services in the advisory sense of that phrase. Nobody at this firm is going to tell you what to buy, and nobody here is going to tell you how much of your Roth belongs in small-cap value. If you want a portfolio built and run for you, hire somebody licensed to do that work. We are glad to sit in the room while they do it, and we will say plainly what each decision costs you in April, but the decision itself is not ours to make and we do not pretend otherwise.

What we do sits downstream of the decision your advisor already made. A sale creates a gain or a loss. A mutual fund throws off a capital gain distribution in December whether or not you wanted the cash. A dollar moved into a self-employed retirement plan reshapes the whole Schedule C picture for the year. All of that lands on a tax return, and the return is the part we own. So investment coordination for freelancers in Austin means we talk to your advisor and to whoever holds the account, in the language those people already use, and then translate what they did into what it actually costs. The IRS lays out the general rules for investment income and expenses in Publication 550, and most of the disagreements we have with advisors trace back to one paragraph somewhere in there.

Here is what that looks like on a real ledger. A freelance motion designer closed the year with 92,000 dollars of profit on her Schedule C and a taxable brokerage account that her advisor rebalanced in November. The rebalance sold 26,000 dollars of a fund she had held for seven months, which threw off a 4,100 dollar short-term gain taxed at her ordinary rate instead of the long-term rate she had assumed. Held six more weeks, that identical sale would have been long-term and would have cost her roughly 500 dollars less. Nobody did anything wrong. The advisor was doing his job and had no way to know her marginal rate, and she had no reason to think a holding period mattered. One phone call in October, costing nothing, would have moved the trade six weeks and kept the 500 dollars. Gains like that get reported on Form 8949 and carried to Schedule D, and we prepare both of those every spring.

The mistake we see over and over is treating the brokerage account and the freelance business as two unrelated worlds run by two people who have never spoken. They are not unrelated at all. Your Schedule C profit is what sets your marginal rate, and your marginal rate is the single number that decides whether a gain is expensive or cheap this year. That same profit figure also decides how much contribution room you have in a self-employed retirement plan, and it helps decide whether the net investment income tax reported on Form 8960 reaches you at all. A freelancer who has a good advisor and a good CPA who have never once been on the same call is paying two professionals to each solve half of one problem, and the half nobody solved is usually the expensive half.

Our tax strategy consulting work is where those conversations get scheduled, and our individual tax return work is where the results either show up or fail to. None of it makes us your investment adviser, and we will put that in writing again any time you want to see it. But the coordination itself is real work with a real dollar value, and it usually pays for itself in one well-timed call before the last week of December. As your billings climb and the account climbs with them, the gap between a coordinated year and an uncoordinated one widens rather than narrows, which is exactly why we would rather open the conversation in a quiet October than in a loud April when every number is already frozen.

Because basis is the number that decides how much of a sale is taxable, and because for a self-employed person it is the number most likely to be wrong. Basis is what you paid for something, adjusted for a long list of events that happen after you buy it. Your broker reports basis to the IRS for what the rules call covered securities, which generally means ordinary stock bought after 2010 and fund shares bought after 2011. That reporting is usually fine. The trouble lives in everything outside that box, and freelancers own more of that stuff than the average employee with a single W-2 does. The IRS walks through the whole subject in Publication 551, and the investment-side rules sit in Publication 550.

The freelancer-specific version of this problem is getting paid in equity. A startup client runs short on cash and hands you shares instead. That is ordinary business income the day you receive it, measured at fair market value, and it belongs on your Schedule C exactly as a wire transfer would. The part almost everybody misses is that the same fair market value becomes your basis in those shares. We have picked up new clients who reported the income correctly in year one, sold the shares in year three, and let the return show a basis of zero because the broker had no record of what the stock was worth on the day a client handed it over. That is not a rounding error. That is paying tax twice on the same dollars, and the IRS never asked anyone to do it.

Run the arithmetic. A freelance developer took 8,000 dollars of stock from a client in lieu of an invoice and reported 8,000 dollars of Schedule C income on it, which is correct. Two years later he sold the position for 19,000 dollars. His real gain is 11,000 dollars. The broker statement, having no idea where those shares came from, showed basis as unknown, and a self-prepared return dutifully copied a zero into the basis column, reporting a 19,000 dollar gain instead. At a 15 percent long-term rate, that clerical shrug cost him 1,200 dollars for nothing. Fixing it took a copy of the year-one invoice and a corrected Form 8949 feeding a corrected Schedule D. The evidence existed the whole time. It just was not written down anywhere a broker could see it.

The other common mistake is the wash sale, and freelancers walk into it more than most because their cash flow forces the timing. December is when a 1099 client pays late, so December is when you sell something at a loss to raise cash and harvest a deduction. Then the automatic reinvestment setting inside the same fund buys back in eleven days later, and the loss is disallowed and rolled into the basis of the new shares. You did not do anything abusive. A checkbox on an account did it for you while you were finishing a deliverable. This is exactly why our bookkeeping work and the brokerage record are supposed to be read side by side rather than in two separate months by two separate people.

So investment coordination for freelancers in Austin is mostly a documentation habit rather than a clever maneuver. We keep a running basis schedule for the positions your broker does not track, which usually means shares taken as payment, shares moved over from an old custodian, inherited lots, and anything bought before the covered-security rules turned on. It is unglamorous work. It also means that the year you finally sell the position, the number in the basis column is defensible, which is a far better place to be than reconstructing a decade of statements under a filing deadline. Our tax strategy consulting engagements start that schedule in the first month of the relationship, and every year it exists is a year the eventual sale gets cheaper and easier to prove.

Maybe, and the surprise is that your freelance income is what pushes you there even though your freelance income is not what gets taxed. The net investment income tax is a flat 3.8 percent, and it applies to the smaller of two numbers: your net investment income for the year, or the amount by which your modified adjusted gross income clears a threshold. Those thresholds are 200,000 dollars for a single filer and 250,000 dollars for a married couple filing jointly, and they have never been indexed for inflation, so more people cross them every year without doing anything different. The mechanics live on Form 8960, and the definitions of what counts as investment income are in Publication 550.

Here is the part that trips up self-employed people. Your Schedule C profit is not net investment income. It is earned income, it already paid self-employment tax on Schedule SE, and it does not get taxed a second time by the net investment income tax. But it absolutely counts toward the modified adjusted gross income figure that decides whether the threshold is crossed. So a strong freelance year does not create the tax by itself. It quietly raises the floor under your dividends and your gains until they poke above the line, and then the tax that arrives is attached to investment income you barely thought about. That is why the form feels so unfair the first time a freelancer sees it. The income being taxed is not the income that caused the problem.

The arithmetic is easier than the explanation. A single freelance copywriter had a good year and finished with 172,000 dollars of Schedule C profit. Her brokerage account produced 38,000 dollars of long-term gains and dividends, most of it from a fund distribution she never chose. Her modified adjusted gross income lands near 210,000 dollars. The excess over the 200,000 dollar threshold is 10,000 dollars. Her net investment income is 38,000 dollars. The tax applies to the smaller of the two, so 10,000 dollars times 3.8 percent equals 380 dollars. Not a catastrophe. But she had never seen the form before, it was not in any estimate she had paid, and it arrived alongside the additional 0.9 percent Medicare tax that starts at the same 200,000 dollar mark for a single filer, which her Schedule SE income triggered entirely on its own.

The mistake here is a timing mistake rather than a math mistake. Freelancers pay estimated tax on Form 1040-ES based on what they think the business will earn, and then a December capital gain distribution or a year-end sale lands on top of a projection nobody revisited. Interest and dividend detail reported on Schedule B shows up in February, months after the last estimate went out the door. The fix is boring and it works: look at the account in the first week of December rather than the first week of April, when the only thing left to do is write the check.

This is where investment coordination for freelancers in Austin earns its keep, because the levers that move this number are almost all on the freelance side of the house rather than the portfolio side. A larger self-employed retirement contribution lowers adjusted gross income and can pull you back under the threshold. So can a legitimate equipment purchase you were going to make in January anyway. Our tax strategy consulting work models those moves before the year closes, and our individual tax return work reports the result. Since the thresholds stay frozen while your rates and your billings do not, the freelancer sitting 20,000 dollars under the line this year should assume the conversation is coming, and should schedule it while there is still time to change the answer.

It is probably the most valuable question on this page, because retirement contribution room for a self-employed person is driven entirely by a number we calculate rather than a number your advisor can look up. Your advisor can open the account. Your advisor cannot tell you how much belongs in it, because the answer depends on your net profit after every deduction, after depreciation, after the home office allocation, and after half of your self-employment tax comes out. The IRS covers self-employed plans in Publication 560, and the individual retirement account side sits in Publication 590-A.

Start with the SEP-IRA, because it is the simpler animal. For a sole proprietor the contribution is capped at a percentage of net earnings from self-employment, which is your Schedule C profit reduced by the deductible half of the self-employment tax you computed on Schedule SE. The rate people quote is 25 percent, but that 25 percent applies to compensation, and a sole proprietor has no compensation, so the effective ceiling works out to roughly 20 percent of that adjusted net figure. There is also an annual dollar cap that the IRS resets each year, and the percentage limit binds long before the dollar cap does for anyone at freelancer scale.

So take a freelance photographer with 60,000 dollars of Schedule C profit. Her self-employment tax runs a bit over 8,400 dollars, and half of it, about 4,200 dollars, comes off the top. That leaves roughly 55,800 dollars of net earnings. Twenty percent of that is about 11,000 dollars, and 11,000 dollars is her SEP ceiling for the year. Now change one thing and keep the same 60,000 dollars of profit. Inside a solo 401(k) she can make an employee deferral out of her earned income up to the annual deferral limit the IRS publishes, and then layer the same roughly 11,000 dollar employer piece on top of it. Same profit, same photographer, and the plan choice alone roughly triples the room. Nobody sold her a different investment. The paperwork was just shaped differently, and the paperwork is the part we handle.

The mistake we correct most often is a freelancer who computed the contribution off gross receipts rather than net profit, or who forgot the half-of-self-employment-tax haircut, and overfunded the account. An excess contribution is not a victimless typo. It carries a penalty that repeats every single year the money sits in there uncorrected. The mirror-image mistake is the freelancer with a W-2 day job who forgets that the employee deferral limit is a per-person limit rather than a per-plan limit, so whatever he already deferred at work eats directly into what the solo plan can accept. Our bookkeeping work exists partly so that profit number is knowable in November instead of staying a mystery until the following March.

Deadlines are where good plans die. A SEP can generally be opened and funded as late as the extended due date of the return, which is why it rescues so many people in September. A solo 401(k) is fussier, and the deferral piece in particular has historically wanted the plan to exist before the calendar year closes. Those rules have moved in the last few years, so confirm the current deadline with us before you rely on it rather than trusting whatever a forum post said in 2019. This is precisely where investment coordination for freelancers in Austin matters, because the decision has to be made while the year is still open, and our tax strategy consulting calendar is built around a November projection for exactly this reason. Pick the plan shape now, and every future year of contributions inherits the better ceiling automatically.

It saves you federal dollars, and it saves them more cleanly here than almost anywhere else, which is a genuinely nice thing about doing this work from Austin. Texas imposes no personal income tax. Your gains are a federal question and nothing else. The state authority for Texas is the Texas Comptroller, and what the Comptroller cares about is sales tax and the franchise tax that applies to business entities. It has no interest whatsoever in your dividends. A freelancer in New York or California carries a second layer of state tax on the same gain that an Austin freelancer simply does not carry, and that difference changes the math on almost every timing decision you will make.

Take a 20,000 dollar long-term gain. An Austin freelancer in the 15 percent long-term bracket pays 3,000 dollars, and that is the end of the conversation. A freelancer with identical numbers in a state that taxes capital gains as ordinary income pays that same 3,000 dollars and then owes a state layer on top of it. The practical result is that harvesting decisions here are simpler and the federal answer is the only answer, so getting the federal answer right carries all of the weight. There is no second jurisdiction to blur it, and there is no state credit sitting there to soften a mistake you make in December.

What the absent state income tax does not do is make you safe. A freelancer in Austin still owes federal income tax and still owes self-employment tax at 15.3 percent on Schedule SE, which is the piece that catches people who moved here from a salaried job in a high-tax state and mentally banked a raise that was never quite that large. The combined federal picture for a self-employed person is frequently heavier than the combined picture for an employee earning the same money somewhere else, because nobody is paying the employer half of Social Security and Medicare for you anymore. That is not a state issue at all. It follows you to any zip code in the country.

The mistake, and it is the most expensive one on this page, is assuming no state income tax means no estimated tax problem. It means close to the opposite. With no state withholding to smooth anything out, every dollar you owe arrives federally on four dates, and Form 1040-ES is how it gets there. A December fund distribution you never chose can wreck a fourth-quarter estimate that was perfectly accurate on the day it was mailed. The safe harbor rules in Publication 505 are the usual escape hatch, since paying in a set percentage of last year’s tax generally protects you from an underpayment penalty even when this year runs hot. Freelancers with irregular 1099 income should be sitting in that harbor by default rather than trying to forecast a business that refuses to be forecast.

So the honest summary is that Austin removes one layer of tax and sharpens everything that is left. Our individual tax return work is where the federal answer gets filed, and our bookkeeping work is what turns the quarterly number into something better than a guess. We are still not your investment adviser and we are not going to become one, but we will read your statements next to your ledger and tell you what the two of them add up to. If you would rather have that conversation while the year is still open, request a consultation and bring your most recent brokerage statement along with your year-to-date profit. Next year the thresholds will not move, your billings probably will, and the freelancer who books the November call is the one who still has choices left to make.