Freelancefolder

Give Yourself a Raise

Posted November 26, 2010 in How-To, Lifestyle

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Congratulations! You are a freelancer. You have taken your own drive, your own talent, and your own skills and forged a path that doesn’t require you to put on a monkey suit and go into the office every day to build someone else’s asset.

Well done.

Now its time to kick it up a notch and start running your freelance business at maximum efficiency. So I am going to let you in on a huge secret that might be the equivalent of giving you a huge raise. This is ninja level stuff.

(This post is for informational purposes only, it is not legal or tax advice. Seek the assistance of an attorney or accountant for actual legal or tax advice.)

What Is Your State Income Tax Expense?

In the US, every state has a different state income tax rate. 25% of us pay 8% or more of taxable income in state income taxes. A few states, like Nevada, South Dakota, and others, don’t charge a dime. That makes a big difference in how profitable a freelancer can be.

Who Are You Giving Your Tax Money To?

There is one concept that causes you to owe income taxes to one state or another. It’s called tax domicile. The state where you are domiciled will collect most, if not all, of your state income taxes. So what? I don’t like the desert and Mt. Rushmore is not as impressive as it seems in the movies. Well, hang on a second. If you understand how the tax system works, you don’t have to spend every waking hour there to get the low tax benefits.

The Law

Your tax domicile is based on where you have your “closest connections.” What that means is very good news for you. It means there is no single thing that they look to to determine where you owe taxes. It is a combination of a lot of things. Every kind of connection you can think of can be thrown into the mix. Anything from where you grew up to where you volunteer your time. And you might be surprised at what you can do with your “closest connections.”

The Big Secret

The big secret about your “closest connections” is that you have a lot of control over where you establish your “closest connections.” That means that you can control which state you make your connections to. If you are wise you will choose a state with low state income taxes.

What Kinds of Connections Matter

Keep in mind, that it is a balance of all of your connections. Just because you have one or two doesn’t mean you are automatically domiciled there. And, there is no exhaustive list of what connections they will look at. That means that almost anything you can think of could be a connection.

• Where you have a house (either own or rent)
• Where you have an office
• Where you spend time
• State of your drivers license
• Where you have your cars registered
• Where you earn your income
• Where you grew up
• Billing address for credit card
• Billing address for cell phone
• And many more…

Why Are Freelancers Perfect for This Strategy?

As a freelancer you have almost complete control over one of the most critical factors: where you earn your income. You don’t have to show up to an office every day, so you can basically work anywhere you want. Most other people have to organize their lives around where their work is. This gives you the ability to control way more of the connections that lead to tax domicile.

Big Secret Number Two

Just because you are domiciled in one place, does not mean you have to spend all of your time there. You have probably been on vacation to a lot of places in your life. Does that mean you changed your domicile while you were on vacation? Of course not. Where you are domiciled should be considered your home, regardless of how much time you spend there. You are on vacation, staying in a vacation home, everywhere else you go.

Big Names Already Do This

This used to be a strategy only for the super rich. Now that laptops and the Internet have become ubiquitous, a lot more people like you can use it. People like Mark Zuckerberg, Serena and Venus Williams, Tiger Woods, and U2 have all used a strategy like this to save a lot of money on their taxes. Tiger alone has saved an estimated $100 million throughout his career! Even Amazon.com does something similar by avoiding having a physical presence in most states so it doesn’t have to charge sales tax to most of its customers.

In Summary

This is a relatively new concept for most people. The ability for so many people to maximize their taxes like this has only existed for a few short years. The concept and the practice has been around, mostly for the uber-wealthy, for a long time. Why not join the uber-wealthy and maximize the profitability of your freelance business by considering your tax domicile. It’s a ninja level business strategy but it might get you a ninja level raise.

What Do You Think?

Have you used this strategy?

Leave your answers in the comments.

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3. Will You Raise Your Rates in 2010?
4. 7 Ways To Give Your Freelancing Career A Boost
5. How to Give Yourself a Bonus Day (and Get Clients to Love You)