Freelance Tax Budgeting
Being self employed can be the greatest thing in the world. Many people dream about it for years before making the leap, many more never make the leap at all. Self employment gives you a real sense of freedom, purpose and responsibility. However, self employment does add a bit of complexity to your tax budgeting situation. The first few years might be a bit of an adjustment for you.
Here are some tips to make freelance tax budgeting a bit easier:
- Determine your tax bracket – Where you live, how much money you make and how you file (joint or single) will determine your tax bracket. Here are two handy calculators to help you determine your bracket:
- Federal – http://www.moneychimp.com/features/tax_brackets.htm
- State – http://taxformcalculator.com/state_tax.html
- Be sure to add 7.5% for your self-employment tax
- Saving money to pay your taxes – Once you’ve determined your bracket, you want to put that percentage away each time you get a payment from a client. Best practice is to separate your business and personal bank accounts so things don’t get messy. We recommend you open a second checking account to deposit your pay. Then open a second savings account to store your taxes. You will want to pay for any business expenses — client lunches, business cards, pens, etc — with your second checking account. You will transfer your “pay” to your existing personal checking account. This is the account you use to buy stuff not related to your business.
- Paying your taxes – So you’ve set aside your tax money, but how does it get from your bank account to the IRS? Well you can either pay estimated quarterly taxes (this is the best option) or pay it all once a year before the mid-April deadline. The Federal Government has an electronic payment system set up if you want to pay your estimated quarterly taxes online, some states have these, as well, but a Google search will help you determine if they do or not. There
- Payment portal: https://www.eftps.com/eftps/
- If you don’t like paying online, use this form to pay your estimated quarterly taxes.
It sounds much more complex and difficult when you list it all out, but once you get in a rhythm it’s pretty easy! Set the important dates on your calendar, keep the required forms on your desktop and develop a repeatable
