I started freelancing a few years ago and still don't understand how taxes work. HALP!
Taxes can be incredibly confusing and daunting especially as a creative. Admin business tasks probably make your skin crawl 😖
I promise this won't be painful 🤗
Your tax rate is 15.3% to cover Social Security and Medicare. Typically as an employee, you split this cost with your employer. Now that you're self-employed, you're considered an employee and employer at the same time.
This rate is applied to your income minus the business expenses you incurred during the year. Most common business expenses include:
Home office or coworking space desk
Professional services (Legal or Accounting/Tax)
I recommend sticking to the IRS estimated tax payment schedule:
1st quarter payment (on January - March income) - due April 15th
2nd quarter payment (on April - May income) - due June 15th
3rd quarter payment (on June - August income) - due September 15th
1st quarter payment (on September - December income) - due January 15th
It's important to keep up with your estimated tax payments because if you don't pay in 90% of your tax liability throughout the year, then you could be hit with a tax penalty for underpaying your taxes for the year.
With that said, I also advise against overpaying your estimated taxes. While the IRS imposes an underpayment penalty, they won't give you interest on your overpayment. So let's say you get a $5,000 refund next year. While it's great to have some extra cash coming your way, but the reality this cash was yours all year and the government was able to use it interest-free all this time.
Last tip for today: did you know accounting software packages now have tax estimate calculations based on the income and expenses you incur each month? This would allow you to put away your estimated taxes each month into a separate account until you make the payment each quarter.
I hope this helps understand your tax situation as a freelancer a little bit better. If you need more guidance to understand your freelance tax position, here's a link to my calendar 🗓 Let's hop on a quick call 🤑