Making money on your own terms can be highly rewarding. But when you’re self-employed or picking up freelance work, you’ll need to account for taxes. In many cases, taxes won’t be withheld in advance, meaning you’ll need to be ready to pay taxes every three months. And if you don’t submit your taxes every quarter, you could end up paying extra in penalties.
Fortunately, with a little planning, you can make your quarterly payments without encountering problems.
Project Your Income
How much money do you think you’ll earn from your freelancing gigs or work as a self-employed individual? If you can arrive at a reasonable estimate, you’ll be able to determine your tax bill. Consider seasonal fluctuations in demand or any business growth you’ve experienced. It may seem difficult to pinpoint a consistent trend, but that’s okay. When in doubt, overestimate your total income. That way, you’ll get a refund at tax time and won’t be slapped with a penalty for underpayments.
Set Aside Money for Taxes
When you get a payment from a client, be sure to siphon off a portion of it for taxes. Keep this money in a separate account that you designate for your quarterly tax payments. You don’t want to take money from this account for any other purpose.
Consider your deductions and social security contributions as you determine the portion you’ll set aside. Generally, it’s advisable to set aside roughly 25% or more of your gross income. You can use a free quarterly tax estimator, too, to help arrive at a dollar amount.
Make Automated Transfers
One of the biggest dangers of being self-employed is the temptation to treat every paycheck that comes your way as money to spend. But if taxes have not been withheld, you’ll run into big problems later. That’s why it can be useful to automate transfers to your designated tax payment account. Schedule a transfer on a weekly or monthly basis to ensure your 25% or 30% is always socked away for quarterly payments. You’ll keep your budget in better shape!
Do a Midyear Audit
You could pick up a new source of income halfway through the year. Or you could lose one. In either case, your total income will shift, so it’s wise to audit your earnings at least twice each year. You can adjust the amount of money you set aside. This is especially useful if your income increases, since you don’t want to be low on money for payments.
You can check to ensure you’re on schedule with your payments according to IRS expectations, too. This translates to making payments in January, April, June, and September. And if you make money in other places, like Canada, you’ll need to be clear on their payment deadlines, as well.
Plan on Quarterly Tax Payments
Quarterly tax payments can seem burdensome when you’re already busy trying to run a business or pick up freelance gigs. But if you take the time to project your income and err on the conservative side with how much money you set aside for taxes, you’ll be in good shape. Automate transfers from a designated tax payment account to give yourself the easiest solution so you can stay on top of your taxes.
