On Wednesday, I wrote a post about everyone’s favorite time of year: tax season.
Today, I bring you a guest blog about tax tips for freelancers. Joseph D’Agnese & Denise Kiernan, authors of “The Money Book for Freelancers, Part-Timers, and the Self-Employed,” tell freelancers that they can have a stress-free tax season (now and in the future). Really! Here’s how:
Top Tax Tips for Freelancers
April 15 sends shivers down the spine of most every American. But for freelancers, tax time can be particularly maddening. While most traditionally employed workers have taxes taken out of their pay automatically, freelancers do not. To be successful — and preserve not only financial health, but sanity as well — independent workers have to learn to look at their income in a whole new way. Here are some tips for freelancers to follow year-round that will make tax season feel like a spring breeze, rather than a cold blast of reality.
1. Mark your calendar
Don’t wait until April to start thinking about your taxes. Independent workers are responsible for paying estimated taxes, as well. These are due June 15, September 15, January 15 and of course, April 15. But remember: April 15 is a double whammy. You a responsible for paying not only the annual taxes for the prior year, but the first installment of estimated taxes for the current year as well.
2. Get organized
Even if you are a company of one, you are a business. That means organizing your finances as any responsible business would. If you are not already, begin tracking income and expenses down to the penny. Receipts are your friend—never let them slip away. Financial software programs — such as Quicken or mint.com — can take some of the pain out of this chore and help make tax time a cinch.
3. Commit yourself
Treat yourself the way a good employer would treat you. A good employer takes a percentage out of your paycheck to send along to Uncle Sam. You have to do the same. Commit today to taking a percentage out of each and every check that comes in the door and setting it aside in a Tax Savings Account (see below). Not sure how much to take out? Look at your previous years’ tax returns (state, federal and city, if applicable). Take the tax you paid each year and divide it by that year’s gross income. Then multiply that number by 100. This will give you a ballpark percentage that you can start taking out of each check. This is number varies wildly from freelancer to freelancer, so mind your own business — not someone else’s.
3. Stay on track
Making more this year than in years past? Less? Then the amount you’re setting aside for taxes might need to be adjusted. On a quarterly basis — when you pay your estimated taxes, for example — take a look at what you’ve earned so far and decide whether or not to adjust your percentages accordingly. The more regularly you do this, the better you will get at this kind of on-the-fly financial housekeeping. And it’s an excellent idea to…
4. Get help
If you haven’t done so already, get a tax guru who can advise you year-round on deductions, estimated taxes, retirement savings and the like. Retirement plans such as a Simplified Employee Pension Individual Retirement Account (SEP-IRA) can reduce your taxable income. So seeking the quarterly counsel of a tax pro is worth every penny (and not as expensive as you think). Send them your quarterly earnings and they should be able to advise you about how much estimated tax to pay and how much to invest for retirement.
5. Divide and conquer
Don’t allow money destined for the Tax Man to mingle freely with money waiting to be taken out on the town. If you don’t want your tax bucks to end up spent on a beer tab, you must set them aside in what we call the dedicated Tax Savings Account. We recommend using an online bank with limited — or better yet, no — ATM access. That way the money goes in and stays in until it’s time to pay up.
ABA: Always be analyzing. Yes, we know it is tough enough to land paying gigs, but you need to be just as nimble to pounce on that money when it comes in the door. Set some aside for yourself, for your future, and for the Tax Man. And cultivate a quarterly habit of taking stock of where you are financially. If you do this, April will be a time to celebrate your financial savvy, not scramble to scrounge for what’s due. Don’t you owe it to yourself and your future?
Joseph D’Agnese and Denise Kiernan are the authors of “The Money Book for Freelancers, Part-Timers, and the Self-Employed: The Only Personal Finance System for People With Not-So-Regular Jobs,” (Crown/Three Rivers, 2010). Joe and Denise have written for newspapers and magazines and have written a number of books together and individually for both adults and children. Reach them at email@example.com. Follow them at http://www.facebook.com/TheMoneyBook.