If you’re on top of things, your 2007 tax return is either filed or extended. If not, what are you doing reading this? If it all felt a little yucky this year take heart. It doesn’t have to be that way. With a little planning and discipline, 2008 can be a lot more pleasant, if not easy.
Pay as You Go
Freelancers who derive the majority of their income from self-employment will need to make estimated payments on a quarterly basis. The US tax system is pay-as-you-go, which means we pay our taxes as we earn our money. A lot of people, especially the newly self-employed don’t realize we’re not allowed to simply wait until the end of the year to pay what we owe. That’s why when you work for someone else, they take the appropriate amount out of your compensation and remit it to the government.
Freelancers have the same pay-as-you-go responsibility, but they have to do it themselves. Most any CPA, tax preparer, or bookkeeper can help calculate your estimated payments and even print coupons with the amount and date printed right on them for you to send them in. All you have to do is write a check and send it to the IRS. That doesn’t hurt so bad now does it?
How Much Do I Owe?
Even if you’re not sending in your payments quarterly, you’ll want to set aside the money to pay those taxes periodically. Remember that on “self-employment” income you owe not only income taxes, but also – if you hit the very low threshold of $400 – self-employment taxes. Social Security and Medicare, aka FICA are in addition to income taxes. When you work for someone else, they pay a portion of Medicare for you, but when you work for yourself, you’re on your own. The term self-employment taxes refers to these taxes.
While everyone’s circumstances are slightly different, it’s a good idea to put away at least 25% – 30% to pay income taxes, whether or not you are required to make estimated payments. Every time you make a deposit, just subtract that percentage. If you don’t trust yourself, transfer the money into a different account or go ahead and pay that amount to the IRS. Once you take the time to get a solid estimate (based on a number of factors such as prior year tax liability, dependents, etc.), your tax bill shouldn’t come as a huge surprise at the end of the year. If you’ve over-saved, consider it a bonus.
For more, check out this old post on Deb Ng’s Freelance Writing Jobs blog. I also like June Walker’s great indie tax advice.
FYI – as a former CPA, who has let my license lapse, the laws of my state prohibit me from preparing tax returns or from offering specific tax advice. Keep in mind this information is intended for educational purposes only. Consult a qualified tax professional to discuss your particular situation.