Taxes for Freelancers - Part IV

Hi friends!

I know it's past Tax Day, but as a freelancer, there are some tax considerations to think about throughout the year. So far in this series, I've covered Getting Started, Getting Organized, and Keeping Good Records Throughout the Year.

Today's topic: Estimated Taxes.

First, what are estimated taxes? The short answer: a way of withholding money from what you make and paying taxes as you go, rather than in one lump sum come April. With no employer withholding things like Medicare and social security, the government expects you to do this quarterly, if you make a certain amount.

That certain amount? Enough to owe $1,000 in taxes.

If you owed $1,000 this year or anticipate owing $1,000 next year, then you should start making estimated tax payments. If you owe $1,000 next year and don't make estimated tax payments this year, the IRS can fine you or charge you a penalty.

However, if you make estimated tax payments all year and end up not owing $1,000 in taxes next year, no harm, no foul. In fact, you may even get a larger refund!

Here are a few examples:

Ex. 1: You are single, making about $18,000 per year in freelance income.

Come tax season, you will owe the federal income tax rate:

10% on taxable income from $0-$9,075 + 15% on taxable income from $9,075-$36,900 + 25% on taxable income from $36,900-$89,350

This works out to be about 12.5%. You will also owe the federal self-employment tax rate of 15.3%.

What does this mean? Well, you could pay the combined 27.8% in estimated taxes throughout the year, or you could assume that you're going to take a few deductions that will knock your income down from $18,000. Let's say you have $6,000 in deductions. This brings your taxable income down to $12,000. Using the formula above, your federal income tax is now 7.4%, meaning, with the 15.3% of self-employment tax (fixed amount), you will owe a total of 22.7% of your $18,000 in federal taxes.

Ex. 2: You are single, making about $40,000 per year in freelance income.

As in the example above, you will owe federal income tax (14.6% - see formula above) plus the federal self-employment tax rate of 15.3%.

You could pay the combined 29.9% in estimated taxes, or you could assume that you'll have, say, $10,000 in deductions. This brings your your taxable income down to $30,000 and your total federal taxes down to 25.4%.

Ex. 3: You are married (filing jointly), making about $80,000 per year in freelance income.

You will owe the federal income tax rate: 10% on taxable income from $0-$18,150 + 15% on taxable income from $18,150-$73,800 + 25% on taxable income from $73,800-$148,850

This works out to be 14.6%. Like above, you will also owe the federal self-employment tax rate of 15.3%.

So, you could pay the combined 29.9% in estimated taxes, or you could estimate, say, $15,000 in deductions, bringing your taxable income down to $65,000. Your federal income tax rate is now 11%. With the 15.3% of self-employment tax, you will owe 26.3% of your $80,000 in federal taxes.

Phew! Still with me? Okay good. :-)

Making Estimated Tax Payments

If you decide to start making estimated tax payments this year, here are a few things to keep in mind:

1. Freelance income is taxed at the federal tax rate (see formulas above) AND self-employment tax rate of 15.3% (12.4% for social security and 2.9% for Medicare). Based on our income and our taxes from previous years, Steve and I set aside 20% of our business income each quarter for federal taxes.
   

2. Don't forget about state tax! Some states have a flat income tax rate and others (like New York State) have a marginal tax rate, based on your income and filing status (single vs. married). Again, based on our income and our state taxes from previous years, Steve and I set aside 5% of our business income each quarter for NYS taxes.
   

3. Mark your calendar! Estimated taxes are due the following dates: April 15, June 15, September 15, and January 15 of next year.
   

4. Save yourself the time and hassle by paying your estimated taxes online. For federal tax payments, create an account at EFTPS.
   

5. Separate your tax money from your take-home pay by keeping funds in a separate savings account. Withhold your tax percentage from every check that comes in and then pay the balance of the savings account every quarter. Remember, overpaying (and getting a refund) is better than underpaying (and paying a penalty)!

Want to learn more? Here are a few helpful resources:

• The Freelancer's Guide to Business and Taxes

• Federal Tax Income Rate Brackets

• How to Pay Self-Employment Tax

• Quarterly Tax Guide for Freelancers

Taxes for Freelancers - Part III

Welcome back to the third post in my "Taxes for Freelancers" mini series (be sure to read Part I and Part II, if you missed them!).

Today, I want to share a bit about my process for staying organized and keeping good records throughout the year. This is essential for making sure tax season goes smoothly!

One thing that helps me stay organized is setting aside a few hours each month to work through a list of business to-dos (inspired by this post).

On the first Friday of each month, I spend a few hours organizing my records from the previous month, checking in on my financial goals, and preparing for the month ahead (make invoices, schedule blog posts, etc.).

Here is my monthly checklist:

FINANCIAL

Schedule credit card payment(s)
Buy Roth IRA mutual funds (set monthly amount)
Make loan payment (set monthly amount)
Review bank statements from this month*

*Other monthly investments and savings are automatic

SD and I set financial goals at the beginning of the year with monthly investment amounts. It's rewarding to see our progress month by month! In addition, I feel more productive and organized when I do all of these more administrative tasks at one time (instead of remembering to pay bills at different times each month).

BUSINESS

Create studio invoices for next month
Write and schedule invoice emails (thank you, Boomerang!)
Record income and mileage for this month in studio budget
Deposit checks
File receipts (I sort mine into categories: Business Travel, Meals, Professional Development, and Business Expenses)
Print assignment sheets for lessons next month
Pay estimated taxes (federal, state) [quarterly]

As a teacher, music director, and full-time student, it helps me to step back every few weeks and evaluate my business as a whole, reflect on my teaching, and plan ahead. Setting aside part of a day each month keeps me accountable in those tasks that can easily be overlooked (e.g. filing receipts, tracking mileage, and setting aside estimated tax).

PERSONAL

Plan blog calendar for next month (I love this one from Em for Marvelous!)
Run computer backup
Back up iPhone photos [quarterly]

Some of the things on this list help me stay on track with my monthly goals, as well (bonus!).

The real secret? Organize and keep records as you go.

1. Report your income and expenses in a spreadsheet each month.
2. File your receipts every few weeks.
3. Tally your business travel receipts when you get home from your trip.
4. Keep a separate bank account for estimated tax money.
5. Keep a little notebook in your glove compartment to document mileage.

Have other creative ideas for staying organized and keeping good records throughout the year? Leave a comment below - I'd love to hear!

Previously:
Taxes for Freelancers - Part I
Taxes for Freelancers - Part II

Taxes for Freelancers - Part II

Welcome back! 

As I mentioned in my last post, SD and I are by no means tax experts, but we've learned a thing or two about filing taxes as freelancers that I thought might be worth sharing. 

This series does not replace talking to a professional - if you're brand new to this, I highly recommend that as your first step! - but it's my hope that these resources and suggestions can serve as a broad introduction to doing your own taxes and keeping good records throughout the year.

Taxes are complicated and they can take up a lot of time, if you're doing things yourself. 

Want to know our secret for staying sane? We start the process in January. 

We work on some of the tasks below on our own and then sit down a few times over the course of February/March to go through the software together (by the way, we use H&R Block).

Here are a few things you can do to get a head start on your taxes:

1. Gather year-end statements and tax documents. 

Some of these come in the mail, others are all online.  Take a few minutes to save PDF versions to a folder on your computer and/or gather all hard copy statements into one place.  Here's a starting list:

• State tax refund(s) from last year

• W-2(s)

• 1099(s) (contracting work, interest, dividends/capital gains)

• 1098-t (if you're a student)

• Student loan statements (you can deduct any interest you paid last year)

• Your self-employment income from last year

• IRA/Roth IRA investment totals

• Health insurance premiums (deductible if you're self-employed)

2. Pull receipts and expense records and calculate totals. 

That professional conference you attended last summer?  Deductible.  That lunch you had with someone you mentor (professionally)?  Deductible.  I sort all of my business-related receipts in an accordion folder during the year; in January, I spend some time calculating totals.  Here are a few categories to help get you started:

• Business Travel (air travel, rental car, tolls, hotel, internet charges when traveling)

• Business Meals (usually, you can write off 50% of this total)

• Business-Related Purchases (books, music scores, equipment)

• Business Expenses (website hosting, office supplies, conference registration, dues)

3. Add up miles driven for business. 

Driving to and from a gig?  Keep track of your mileage!  Any time you drive to "work" (a place that doesn't send you a W-2), you can deduct that mileage using the federal mileage rate. 

It's best if you can keep something in your car that will prompt you to write down starting and ending mileage for each trip, but if that doesn't work for you, keep track of the dates and destinations and calculate the mileage later.  Also, figure out the total number of miles you drove last year (they'll ask for this number, too).

4. Make a list of any charitable donations. 

Whether you donate a bag of clothes to Salvation Army or make an annual donation to your Alma Mater, you can report all charitable giving on your taxes.

5. If you paid estimated tax last year, look up these payment amounts (federal and state). 

If you make more than a few hundred dollars a year in your freelance work, it's a good idea to make estimated tax payments (federal and state) each quarter (April 15, June 15, September 15, and January 15), since no one is withholding money from your paycheck.  You can do this online pretty easily. 

A good rule of thumb is to pay 5% of your quarterly earnings to your state and 20% to federal. 

When you file your taxes, they'll ask how much you paid each quarter, so have these amounts ready.  If you underpaid during the year, you have to pay a fine; if you overpaid during the year, you get a refund (yay!).

Hope this little glimpse into our process is helpful!  More ideas, strategies, and helpful hints coming soon in Part III!

Previously:
Taxes for Freelancers - Part I

Taxes for Freelancers - Part I

I'm excited to share this post with you today, the first in a mini series on taxes for freelancers.

I know, taxes are super fun and exciting, but as a freelancer, it's part of managing your own small business.

SD and I have been doing our own taxes for more than five years now, and, while we don't consider ourselves experts by any means, there are a few things we've learned along the way. I'll be sharing a little bit of our process in upcoming posts.

To get us started, I pulled together five helpful resources on where to begin and getting organized (always a good refresher, even if you've been doing your own taxes for a few years now!):

1. How to Do Your Taxes if You're a Freelancer
2. Tax Filing Tips for Freelancers and Bloggers
3. Tax Tips for Self-Employed Professionals, Freelancers and Contractors
4. Freelance Taxes #1: The Basics of Getting Started and Preparing Your Taxes
5. Tax Advice for Freelancers in 2014

Do you do your own taxes? What are some of the things you've learned as a freelancer?