Congratulations! You’ve freed yourself from overbearing bosses and hygienically challenged co-workers—you’re freelancing! But with freedom comes responsibility, like keeping on top of your taxes.
Step 1: Track expenses Make a second spreadsheet for business expenses, with columns for the date of the receipt, the vendor’s name, and the amount of the expense. Keep this up to date, and hold on to receipts for anything you may be deducting.
TIP: Open a high-interest savings account. If you’re diligent about putting money away for your taxes, you’ll earn some interest on it before it has to go to Uncle Sam.
TIP: The amount of tax you’ll pay depends on your income. If you’re pulling in middle-class money, 30% to 35% of your gross income is about right.
Step 2: Take appropriate deductions Familiarize yourself with the deductions you can take as a self-employed person. When you’re working for a company, the cost of doing business—like office supplies, electronic equipment, and client entertaining—is covered for you. When you’re working for yourself, those expenses become write-offs.
Step 3: Set aside your taxes Every time you’re paid, immediately take the amount of taxes you expect to owe on that invoice and set it aside it in a savings account. Keep your net income and your tax money as separate as possible—consider it money already spent, or you’ll be in trouble when it’s time to pay up.
TIP: If you can’t afford a full-time accountant, at least talk to a local accredited tax professional. Tax laws can vary by state and even by city, so make sure you’ve got the right information for your locale.
FACT: The first federal income tax in the United States was imposed during the Civil War.
TIP: To make sure your payments are correctly attributed to you, write your social security number on the memo line of any checks you mail to the IRS.
Step 4: Be reasonable Be reasonable about what you write off. If you want to deduct your internet bill as a business expense, but you only use the web for business half the time, then only claim half of it.
Step 5: Keep records Set up a spreadsheet on your computer that has columns for the invoice date and number, the client’s name, the gross amount you were paid, the amount you’re putting away for taxes, and the net total.
Step 6: Don’t be late! Don’t be late about filing your taxes. Delays can lead to penalties and interest.
Step 7: Pay quarterly Pay your quarterly taxes. For freelancers, April 15th isn’t the only date taxes are due. You’ll need to pay taxes based on your estimated annual income on June 15, September 15, and January 15, too. Go to www.irs.gov for the estimated tax vouchers and instructions.
Step 8: Hire an accountant If you can afford an accountant, hire one. He may pay for himself in the amount of time, aggravation, and money he saves you by knowing his stuff.