There are a lot of reasons to give up the day job and go the freelance route. Being able to set your own schedule, focus on a product (or service or market) you love, cut your commute time down to however long it takes you to go from your bed to your home office setup and never having to deal with that nightmare supervisor or coworker all feel really great. And, of course, the fact that freelancers command more per hour than their salaried counterparts is nothing to sneeze at. Who here hasn’t heard some freelancer talking about making $75-$100 (or more!) per hour and thought “wow! I want to do that!”
What most people don’t know is that one of the reasons freelancers get paid so much more for their time is because they have to charge more per hour (or project) to keep themselves financially afloat. This is because freelancers have to manage all of their money stuff themselves. They have to do their own bookkeeping, their own payroll and even do their own taxes. And, unlike income taxes that only eat up a small chunk of time once a year for someone on salary, freelancers have to pay taxes multiple times a year. Taxes get very complicated very quickly.
Luckily, there are a few things that freelancers can do to make taxes much easier to deal with. Here are some of them.
1.Cut it in Half
You know that you are going to have to set aside certain percentages of every payment for federal, state and sometimes even city or county taxes (it depends on how you register your business and where you live). These percentages vary depending on your location, how much you earn, etc. The easiest way to make sure you don’t accidentally spend money that you’ll need for taxes is to simply cut your payment in half. Half goes to you for your living expenses, savings accounts, investments, etc. The other half gets put away for your quarterly tax payments. Sure you could do the math down to the penny, but this is simpler, saves time and could leave you with something left over each quarter.
2. Record and Keep Everything
Keep track of every single penny that you earn and that you spend. A lot of the things you’re buying are likely business expenses and can be written off to reduce your tax burden. The IRS isn’t just going to take your word for it, though. This is why you need to keep track of your receipts and make sure that you have a thorough and exact record of expenditures and earnings.
3. Track in Real Time
The best way to keep track of your payments and spending is to log everything as soon as it happens. Log everything on the day it happens. This way your memory will be fresh and you won’t risk losing an important piece of documentation.
If tracking things longhand isn’t your style (which is the cast for almost everybody reading this, we’ll bet), don’t fret! There are a bunch of really great apps and programs out there that will allow you to scan receipts, make notes about purchases, etc.
There are even apps that will integrate with your accounting software so that you don’t have to spend a bunch of time inputting and exporting data between programs.
4. Pay On Time
Freelancers have to file estimated tax payments at least once per quarter. In your first year of freelancing, you’ll base this number on what you earned so far that quarter. In your subsequent years, the amount due will be based upon the previous year’s earnings. If you don’t pay at all and decide that you’ll simply pay everything in one lump sum when you file your annual returns, you’ll likely face some hefty fines.
5. Hire a Professional
Many freelancers love the autonomy that comes with freelancing and decide that they want to do everything–including managing their taxes–themselves. If you’re an accountant by trade, this won’t be a huge deal. If you’re not, however, it is always better to hire a professional. This is especially true now, says TaxBuzz, because new developments like the Affordable Health Care Act and the Tax Increase Prevention Act make tax filing a much more difficult task than it use to be. Hiring a professional is well worth it because it reduces your risk of making mistakes!
Remember: there is no such thing as being paid “under the table” or “in trade” when you are a freelancer. Everything must be tracked and recorded for the IRS. Use these tips to make taxes much less scary for yourself and to increase your financial stability!