How to Save For Taxes Throughout The Year
We’re halfway through April 2016. That means you not only just filed your federal tax return, you also probably handed over a check to Uncle Sam for estimated taxes.
The ability to save for taxes as a freelancer can be confusing, frustrating and daunting. There are so many naunces involved that it’s one of the biggest complaints I hear from freelancers all the time – how am I supposed to manage business expenses, paying myself and taxes all at the same time?
From my experience it takes a little trial and error. However, the best method I’ve found is to save for taxes over time. Here is how you can do that.
Sock away at least 15% for self-employment tax.
The self-employment tax is the bane of your existence as a freelancer. That and having to purchase your own health insurance.
The good news is you at least know what the rate is ahead of time so that you can save for taxes as the year rolls out. The current rate according to the IRS is 15.3 percent. That means you know you need to be saving at least 15 percent of your net profit for taxes.
When I first started freelancing (this was before I had an accountant) I simply tried to save 15 percent of every client payment I got. This usually meant that after deductions were taken into account that I was covered. In fact, it led me to usually over save.
Not only that, but since I was saving 15 percent of all revenue off the bat I didn’t have to play guessing games trying to figure out how much money I’d have left over after expenses and taxes. Simply put, the taxes were taken care of upfront so I already knew not to count on that money.
This is a method discussed in the book The Money Book For Freelancers, Part-Timers and the Self-Employed which I highly recommend.
Get an accountant.
I’m on team don’t do your own taxes. Once I started making more money (and subsequently had more expenses) I knew I needed help. This was when I implored the help of an accountant.
The good thing about accountants is they know those little nuances that you don’t. For example, I just learned from my accountant that you can’t deduct health insurance premiums for estimated tax payments but rather it’s reserved for annual tax returns. Had I tried to do it myself, I would have subtracted the cost of my health insurance premiums from my gross revenue.
He also knows all about that equipment depreciation and how it affects taxes. I don’t know about you, but I certainly don’t have the time to figure this all out and potentially make a mistake crunching the numbers.
Do the best you can.
The best piece of advice I could give you is to just do the best you can. You know you have to save for taxes as time goes on, but we’re not always perfect and that’s okay. As long as you have it at the forefront of your mind and know the numbers, you should be okay.