There are perks and downsides to living the life of a freelancer.
When it comes to handling taxes, however, there should be zero worries regarding tax liabilities estimates.
Freelancers must navigate a host of tax responsibilities that are typically handled by a payroll department. Setting aside money for tax purposes can be stressful, especially to those who are new to being their own tax expert.
With that in mind, here are some tactics that can be practiced year-round to prepare freelancers for April 15.
- Set aside funds for estimated quarterly payments to the IRS. Paying on April 17, June 15, September 17 and January (2019 schedule), lets self-employed individuals pay as they go, avoiding the large, tax surprise in April each year.
- Count on paying anywhere from 22% – 37% of your NET income toward taxes. Yes, that seems like a large effective tax rate, but this estimate reflects self-employment taxes, as well. These are known as FICA taxes, which cover Medicare and Social Security that would have otherwise been partially paid by an employer. Since you are now both the employee and employer, you’re on the hook for FICA taxes.
- If you’re falling in a 22%-37% tax bracket, we should discuss options for tax savings under a different entity structure.
- Don’t forget about the cost of doing business in estimating your tax liability. This means that paying 22-37 percent isn’t necessarily touching all your income – only that which is taxable. A Schedule C allows you to subtract your business expenses from your take-home income.
- Keep track of your deductible expenses, as they will be needed to complete your Schedule C Form. Deductible expenses are all expenses considered ordinary and necessary to the business and include travel, mileage and office costs.
- Follow the rule of paying yourself first. As income rolls in, set aside both for anticipated tax costs and for a rainy day. This financial discipline will help you make up for any discrepancies to your quarterly tax payments and other unexpected costs.
- Estimate your business earnings ahead of time. This estimate can then be multiplied by 30 percent and divided by four to give you a snapshot of how much you’ll send to Uncle Sam.
- Pay early. If you anticipate a busier quarter and higher earnings, then take the opportunity to pay ahead of time and get ahead of schedule on your tax liability.
For additional guidance and resources for a successful tax year, contact us today.
