It’s April 15th – the date recognized in the U.S. as “Tax Day.”
It is the deadline for filing your tax returns for the previous years.
No one enjoys forking over a part of their income to the government. Freelancers, since they are self-employed, have the unfortunate privilege of paying self-employment tax in addition to their income tax.
This additional tax (which amounts to a little over 15% of self-employment income) is part of the reason why freelancers must charge a higher hourly rate for their services than an employee will receive in hourly wages for the same work.
Why Tax Day Is a Fun Day for Me
I’ve never dreaded April 15th. Partly because I’ve never waited until Tax Day to file my tax returns. My tax returns are usually filed by mid-February. Secondly, because it’s a birthday of a family member, so we’re always celebrating on that day.
So, why do I file so early?
My taxes are all paid up-to-date by the end of January. I have no reason to put off filing.
In reality, every freelancer should have at least 95% of their taxes paid before January 31st of the following year to avoid penalties. Every quarter, a freelancer should be making estimated tax payments to the federal government (and state government if your state has an income tax). By keeping up on the quarterly tax payments, that final payment in January is no big deal.
When Tax Day Hurts
Many freelancers are writing out big checks to the IRS today. Some are cleaning out their bank accounts. Others are hoping to negotiate a payment schedule for taxes with the IRS because they just don’t have the full amount of funds available to pay the taxes due. For some freelancers, this is the end of their freelance career, which is a sad thing.
It doesn’t have to be that way!
Keeping the IRS Happy and Your Freelance Business Solvent
The number one thing to remember is that you are running a business. As a business you have many more expenses than an employee, self-employment taxes being one of them. Secondly, your employer used to send your take your taxes out of your paycheck and send them to the government for you. This is nothing new. It just is now become your responsibility.
Everyone handles their finances differently, but everyone has some kind of system that works for them. Create a system that helps you stay current on those estimated tax payments. Here are some ideas:
- Keep tax money in a separate savings account rather than sitting in your checking or mingled with personal savings.
- Designate a percentage of your income to go to taxes (this will vary for everyone) and take that percentage out of every payment you receive and move it to your tax savings account.
- Another option would be to designate funds from a particular ongoing client to fund your tax savings each month.
Those are just some of the things I’ve used to keep myself ahead of the tax man and always pay my quarterly estimated taxes in full and on time.
I love to hear some tips from other freelancers. What system do you use for keeping your tax payments up to date?