Taxes were officially due two weeks ago yesterday and I’m still sweating bullets. Working as a freelancer provides a unique array of enjoyable benefits, but tax season sends shivers up my spine. From estimating quarterly tax payments to filling out that pesky Schedule C, freelance taxes differ significantly from the average worker bee’s simple return. Regardless of how tempting it feels to hide our heads in the sand, it’s essential to develop a strategy for handling financial records year round. If you’re anything like myself, consider the following keys I’m using to keep my freelance taxes for 2015 on the right track.
Disclaimer: Just in case you forgot, I’m not a tax professional or financial adviser. My personal opinions shouldn’t be used as a substitute for the guidance of a competent, experienced expert.
Start Saving NOW
It’s really not rocket science: put a portion of every payment you receive in savings. Nobody wants to face a massive tax bill with limited means to pay Uncle Sam. Place a predetermined percentage of your earnings in a dedicated savings account and get prepared for that impending payment.
Bankrate has put together a helpful chart of brackets for American taxpayers. You can use these brackets to work out how much you need to place aside. Be sure to estimate tax liability for every jurisdiction, lest you face an unexpected additional payment. If you’re fortunate enough to live in a state that doesn’t levy income tax, you’ll likely only need to worry about the federal tax brackets. On the other hand, if you live somewhere like New York City, you’ll need to estimate federal, state, AND local taxes. Eek, why do I live here?
For good measure, consider throwing in a couple extra percentage points. In the worst case scenario, these monies will help you cover discrepancies you weren’t anticipating. Assuming you did your math correctly, you can consider the extra chunk of change to be your “refund” of sorts next April.
Clean Up Your Act
While some people have a natural knack for budgets, numbers, and endless spreadsheets, I have to work to keep myself diligent in this arena. Google Sheets are a lifesaver for me. From tracking pitches and proposals to tallying monthly earnings, I love this cloud-based tool! My Google Apps subscription includes 30 GB of free drive storage, but you can also use up to 15 GB of space in a Google Drive with any Gmail account.
In addition to using Google to keep thoughtful financial records, I started using QuickBooks Self-Employed earlier this year. If you’re like me and end up using the same accounts for all of your expenses, you’ll love how this simple tool works. You link all of your financial accounts, and then classify transactions as personal or business costs. The tool keeps a running tally of your business income for the year, and it uses the information you’ve provided to continually update your next estimated quarterly tax payment.
Even if you don’t opt to use QuickBooks, you should figure out a simple system for estimating your quarterly taxes. Not only will it help make April less stressful every year, but getting your quarterly taxes out of the way will ensure you don’t get hit with penalties for paying late. After all, quarterly payments are a requirement, not a suggestion.
Know Your Deductions
Repeat after me, “deductions are my friends!” Don’t overpay your taxes, simply because you haven’t taken the time to carefully classify your spending over the course of the year. You might be surprised to discover some of the deductions available to you as a freelancer. Do you drive and meet clients for in-person consultations? Deduct the mileage. The domain and hosting fees you pay for your portfolio or blog? Deductible. Pay for software access, like the aforementioned Google Apps or QuickBooks? Deduct ’em!
Of course, all of these potential deductions won’t do much to impact your tax bill if you don’t carefully track your spending. This is one of the reasons I’m loving QuickBooks Self-Employed. Every business transaction is automatically classified using the categories provided by the IRS, and you can leave detailed notes if necessary. Do you really trust yourself to remember you paid $14.99 in hosting fees last year or $4.99 for copier paper? I doubt it! Find a tracking system and save yourself money.
How are you preparing for paying your 2015 freelance taxes? What tools do you use to estimate your payments and keep track of your spending?