Help me not owe a bazillion dollars in taxes next year.
February 27, 2013 10:10 PM
Somewhat unexpectedly, I find myself working as a full time freelancer. Help me anticipate the tax situation.
I have done the freelance income song and dance before, but up until now it's been an occasionally significant side gig (less than 10% of my total income). Now it looks like the vast majority of my 2013 income is going to be of the 1099-able kind.
How do I manage this without just sort of sweeping it under the rug and discovering next April that I owe thousands of dollars in taxes? I'm thinking of opening a separate savings account just for tax withholding. Is that the right thing to do? How much should I set aside? Should I do quarterly estimated taxes or pay in advance somehow? What's best practices here?
Luckily most of my income is coming from one client, who I will be invoicing regularly, and who pays promptly, so I probably don't need to deal with spreadsheets and shaking people down for money. I mainly just need to figure out how to make it right with the feds.
It doesn't look like I'm going to be making more money, on the whole, than I did in previous years -- if anything, I'm taking a pay cut. It's just that something like 75% of it is going to come as freelance income with no taxes withheld.
So far I'm doing fine with other freelancer issues like time management, workspace, routine, etc. and am not too interested in advice about health insurance. My main concern right now is financial.
I have done the freelance income song and dance before, but up until now it's been an occasionally significant side gig (less than 10% of my total income). Now it looks like the vast majority of my 2013 income is going to be of the 1099-able kind.
How do I manage this without just sort of sweeping it under the rug and discovering next April that I owe thousands of dollars in taxes? I'm thinking of opening a separate savings account just for tax withholding. Is that the right thing to do? How much should I set aside? Should I do quarterly estimated taxes or pay in advance somehow? What's best practices here?
Luckily most of my income is coming from one client, who I will be invoicing regularly, and who pays promptly, so I probably don't need to deal with spreadsheets and shaking people down for money. I mainly just need to figure out how to make it right with the feds.
It doesn't look like I'm going to be making more money, on the whole, than I did in previous years -- if anything, I'm taking a pay cut. It's just that something like 75% of it is going to come as freelance income with no taxes withheld.
So far I'm doing fine with other freelancer issues like time management, workspace, routine, etc. and am not too interested in advice about health insurance. My main concern right now is financial.
This offers a decent summary of one particular thing -- whether you need to pay quarterlies this year or have a year's grace to squirrel away the IRS's share in an interest-bearing account and pretend it doesn't exist until tax time.
posted by holgate at 10:52 PM on February 27, 2013
posted by holgate at 10:52 PM on February 27, 2013
I've been freelancing for over ten years, and I pay quarterly, but the best person to be able to advise on that is an accountant. (Who will also be able to help you figure out the estimated for your quarterlies if you need them.) I also sock away 30% of each paycheck specifically for this reason - basically, I do my own withholding. You are NEVER going to regret saving for your taxes as a freelancer.
But I would talk to a pro - as a freelancer, you can also write stuff off, etc. I see you're in Los Angeles. I see a great guy in the Valley - feel free to memail me if you want his info. Seeing a pro for something like this will probably end up saving you money (and is helpful for piece of mind).
posted by Countess Sandwich at 11:08 PM on February 27, 2013
But I would talk to a pro - as a freelancer, you can also write stuff off, etc. I see you're in Los Angeles. I see a great guy in the Valley - feel free to memail me if you want his info. Seeing a pro for something like this will probably end up saving you money (and is helpful for piece of mind).
posted by Countess Sandwich at 11:08 PM on February 27, 2013
My Canadian freelancer experience is a bit different from the American version, but yes, if you don't have to submit quarterly in 2013, stash that money and get some interest on it if at all possible.
Remember, if you are still freelancing in 2014, you will have to pay your first quarterly installment of taxes for that year on January 15, 2014, according to holgate's link. That means you will be paying out money you haven't even earned yet.
So this year, put aside the money you expect to be charged (as employer and employee taxes) for 2013 AND the first quarter of 2014. While you should try to figure out your possible deduction sources (this is where an accountant may be worth it), don't try to subtract your expected expenses from it. You are putting the money somewhere that will pay interest, so unless you're really living hand to mouth, live as simply as you figure you can, and let a little extra money accrue. If you wind up saving more than needed, terrific! Taxes are covered and you may have a little more for your emergency fund, too.
posted by maudlin at 11:39 PM on February 27, 2013
Remember, if you are still freelancing in 2014, you will have to pay your first quarterly installment of taxes for that year on January 15, 2014, according to holgate's link. That means you will be paying out money you haven't even earned yet.
So this year, put aside the money you expect to be charged (as employer and employee taxes) for 2013 AND the first quarter of 2014. While you should try to figure out your possible deduction sources (this is where an accountant may be worth it), don't try to subtract your expected expenses from it. You are putting the money somewhere that will pay interest, so unless you're really living hand to mouth, live as simply as you figure you can, and let a little extra money accrue. If you wind up saving more than needed, terrific! Taxes are covered and you may have a little more for your emergency fund, too.
posted by maudlin at 11:39 PM on February 27, 2013
I'm thinking of opening a separate savings account just for tax withholding. Is that the right thing to do? How much should I set aside? Should I do quarterly estimated taxes or pay in advance somehow? What's best practices here?
The separate savings account is called the U.S. Treasury and they don't like it when you hold onto their money. You have to pay quarterly taxes for FICA and federal tax withholding and REMEMBER that 1099 income means you have to pay the employer's and employee's share of FICA which is 15,3%. In other words, the tax burden on that 1099 income is much greater than you might expect. You might also be on the hook for state and local tax payments are well.
Best practice is to seek the qualified advice of a local accountant or bookkeeper.
posted by three blind mice at 2:02 AM on February 28, 2013
The separate savings account is called the U.S. Treasury and they don't like it when you hold onto their money. You have to pay quarterly taxes for FICA and federal tax withholding and REMEMBER that 1099 income means you have to pay the employer's and employee's share of FICA which is 15,3%. In other words, the tax burden on that 1099 income is much greater than you might expect. You might also be on the hook for state and local tax payments are well.
Best practice is to seek the qualified advice of a local accountant or bookkeeper.
posted by three blind mice at 2:02 AM on February 28, 2013
Quarterly payments are estimated based on the previous year's freelance income. You would be well-advised to make them anyway, even if they are fairly token. But you will not be penalized for this year if you only make the estimated quarterly payments based on the previous year's freelance income.
That being said, apart from that, at least do a monthly sweep of 20% to 30% of your freelance income into a holding area or other bank account.
What you should also do is keep very careful track of your work-related expenses as you go. Barring a nice ongoing spreadsheet, at the very least you should use a single debit card as the thing that incurs your expenses, so that you can review the statements at tax time for expenses.
[I am not an accountant, in the SLIGHTEST. You should talk to one. I am a terribly messy frequent freelancer, which is why I look at both the ideal behavior and then the more... realistic behavior.]
posted by RJ Reynolds at 6:02 AM on February 28, 2013
That being said, apart from that, at least do a monthly sweep of 20% to 30% of your freelance income into a holding area or other bank account.
What you should also do is keep very careful track of your work-related expenses as you go. Barring a nice ongoing spreadsheet, at the very least you should use a single debit card as the thing that incurs your expenses, so that you can review the statements at tax time for expenses.
[I am not an accountant, in the SLIGHTEST. You should talk to one. I am a terribly messy frequent freelancer, which is why I look at both the ideal behavior and then the more... realistic behavior.]
posted by RJ Reynolds at 6:02 AM on February 28, 2013
I am not a freelancer, but I do pay quarterly estimated taxes. The first estimated payment for 2013 is due April 15th. The last one is due January 15. I'm getting this information from the IRS 1040-ES form. you don't have to file it, but it does walk you through how much and when to pay.
Note that state penalties for not paying estimated taxes tend to be higher and are more likely to be enforced, so definitely make sure California gets its pound of flesh.
posted by matildatakesovertheworld at 6:45 AM on February 28, 2013
Note that state penalties for not paying estimated taxes tend to be higher and are more likely to be enforced, so definitely make sure California gets its pound of flesh.
posted by matildatakesovertheworld at 6:45 AM on February 28, 2013
If you'e working from home keep in mind you probably can claim a percentage of your rent/mortgage/utilities and equipment, health insurance premiums, etc. Start keeping a spreadsheet of those instead of waiting until the day before seeing your accountant like I do.
Usually you can skip paying quarterlies the first year you're self-employed but since you've had self-employment income for some time (even small) this might not fly. If I were you I'd pay your quarterlies from the start or at the very least pull 30% of all income into savings.
posted by Bunglegirl at 7:28 AM on February 28, 2013
Usually you can skip paying quarterlies the first year you're self-employed but since you've had self-employment income for some time (even small) this might not fly. If I were you I'd pay your quarterlies from the start or at the very least pull 30% of all income into savings.
posted by Bunglegirl at 7:28 AM on February 28, 2013
Lifelong freelance here, seconding suggestions to engage an accountant. She will help you set up a routine for recording expenses, etc, and saving up for quarterly payments. Congratulations on being free!
posted by fivesavagepalms at 8:01 AM on February 28, 2013
posted by fivesavagepalms at 8:01 AM on February 28, 2013
three blind mice, I've done some freelance work before and have experience paying taxes on 1099s, so I know a bit about it. What has changed is that my 1099 income has gone from a few thousand dollars a year, in a really big year, to like 25-30K. In other words, from a drop in the bucket to my major source of income.
I have never done quarterly taxes before, because my freelance income was so erratic (I'm not sure I even had any in 2012) and the taxes on it were such a small amount.
--
An accountant sounds like a great idea, and Countess Sandwich, as a matter of fact I work in the Valley so your rec would be very welcome.
posted by Sara C. at 8:13 AM on February 28, 2013
I have never done quarterly taxes before, because my freelance income was so erratic (I'm not sure I even had any in 2012) and the taxes on it were such a small amount.
--
An accountant sounds like a great idea, and Countess Sandwich, as a matter of fact I work in the Valley so your rec would be very welcome.
posted by Sara C. at 8:13 AM on February 28, 2013
Not that you should take my word over an accountant's or the Freelancer's Union, but what I do is send in quarterly taxes, both state and federal, based on an estimation of what I'll make, at the same percentage as my withholding rate for my real job/bracket. Sometimes the fourth quarterly payment is not necessary, as it can be challenging to accurately predict what I'll make.
posted by troywestfield at 8:23 AM on February 28, 2013
posted by troywestfield at 8:23 AM on February 28, 2013
Just hire an accountant, that is probably the best money I spend on my business all year - mine saves me so much more than his fee I regret not doing it from the very first day I started freelancing.
posted by bradbane at 7:59 PM on February 28, 2013
posted by bradbane at 7:59 PM on February 28, 2013
If the income is steady and consistent, I'd setup some kind of automatic banking transfer of funds into a separate savings account. Find out what your tax bracket is and use the appropriate tax percentage to put into that account. Set up the account and the automatic transfer and forget about it. Don’t draw any funds from it except to pay the tax man.
If the income is neither steady nor consistent, then do the same as above, but you’ll need to manually redirect the appropriate percentage of money into the new back account.
Think of it as you would if you escrow your own funds to pay for real-estate tax. If you are a home owner and your mortgage company doesn’t escrow your real-estate taxes, that annual real-estate tax bill is terrifying if you don’t plan for it.
Good luck.
posted by WestChester22 at 8:08 AM on March 1, 2013
If the income is neither steady nor consistent, then do the same as above, but you’ll need to manually redirect the appropriate percentage of money into the new back account.
Think of it as you would if you escrow your own funds to pay for real-estate tax. If you are a home owner and your mortgage company doesn’t escrow your real-estate taxes, that annual real-estate tax bill is terrifying if you don’t plan for it.
Good luck.
posted by WestChester22 at 8:08 AM on March 1, 2013
This thread is closed to new comments.
posted by carsonb at 10:34 PM on February 27, 2013