February 21, 2019 by David Riedel
Taxes are a pain for everyone. And whether you do them yourself (ugh), take them to one of those big tax prep companies (where I’ve always known more about tax law than my preparer), or use an actual accountant-type person (my suggestion), there are unique headaches freelancers face.
For example, almost no employer (we’ll call them employers to make life simpler) takes care of your payroll taxes for freelance work. In the decade I’ve been doing it, not a single tax has been removed at the company level. Therefore, you’ll have to do it yourself.
It’s a bummer. What was once a $1000 paycheck is now, essentially, a $600 paycheck. Here are some tips.
- Figure out which federal and state tax bracket you fall into and stick that money somewhere else. Don’t spend it. You’ll need it in April. If you live in Wyoming, Washington, Texas, South Dakota, Nevada, Florida, or Alaska, don’t worry about state income tax. If you live in New Hampshire or Tennessee, you only have to worry about taxes from interest and dividend income.
- If the last big or small company you worked for had a 401(k) program, consider opening an IRA. Your contributions may be partially or fully deductible, and money in the IRA generally isn’t taxed until distribution.
- You will be hit up for payroll taxes (Social Security and Medicare), which is about 15 percent.
- Make sure you take all the deductions you can. Use a home office? You can deduct the utilities used to power that office (you’ll need to know what you pay each month and the square footage of your office space versus the square footage of the home). Freelancers can usually write off food as it relates to business, travel expenses (hotels and gas mileage, for example), and office expenses.
- If you need to get a certification in your field, you may be able to write off the costs.
That’s just the beginning. If you’re a freelancer and don’t want to worry about how much to put aside, I’d suggest putting away more than you think you’ll possibly need (if you can afford it), or as I wrote above, hiring an account. One who specializes in small business owners (that’s you) is your best bet. And if you put aside more than you owe, it’s almost like getting a refund.