Other Financial Issues

Something that most translators don’t realize during their first year in the profession and most would-be translators don’t consider is the financial aspects of working for yourself. This is complex, and changes from year to year, so I’ll be general here. However, keep all this in mind, and keep track of all this, because it is not only important, but it’s the law. And consult with a tax professional for answers to any detailed or unusual questions.

Free-lance translators are self-employed, meaning that they have to file a "Schedule C" at the end of the tax year. They also have to pay quarterly estimated income tax (both federal and state, unless your state does not require payment of state income tax). This can be difficult to do since a translator typically doesn’t know what his or her income will be. And they have to pay self-employment tax.

Sound unpleasant? Well, there’s more. Free-lance translators also have to pay all their Social Security tax, all their FICA tax, and any other taxes your state and our federal government invent in the future. Freelancers also have to fund their own retirement plans, though this does have some advantages, including more control over how your retirement funds are invested and higher ceilings for annual investment in retirement funds. And self-employed people need to arrange for their own health coverage and life insurance (if necessary), both of which tend to cost progressively more per year as one ages. And to top it all off, you have to pay Self Employment Tax, though one-half of that amount is deductible from your overall income tax. All in all, free-lancers end up paying a lot more in tax than someone who works for someone else.

However, you can take many more deductions than people who are regular employees can. First and foremost is the well-known "Business Use of Home" deduction. You can also deduct as expenses any and all equipment, tools, and supplies (computer hardware and software, paper, stamps, envelopes, paper clips, erasers, dictionaries, etc.) that you use, as well as a percent of your telephone and utility bills, and a part of your medical insurance costs (this percentage changes every year). Furthermore, you can deduct advertising costs, finance charges for business stuff bought with a credit card, and cost of membership to professional associations and subscriptions to professional journals and magazines.

Does this all balance out somehow? For some people more than others it does. As long as you keep track of everything you do, keep the receipts and records of when and where you do it, and take the time to prepare your taxes accurately and completely, you shouldn’t have any problems in this area.

A word of advice, however. Although recent changes to how the IRS performs audits as well as improvements to the IRS’s computer systems seem to be leading to more responsible auditing, all self-employed people are still vulnerable, particularly those whose annual income is higher than roughly $75,000 or whose deductions represent a substantial percentage of their annual income. In other words, don’t get too cute or clever with the IRS, or at least do so under the expert advice of an accountant.