Working for yourself is awesome. But the taxes and saving for your taxes is definitely not. Let's go over a few tips for saving for taxes when you're self-employed.
Let's go over the basics first. Any worker who makes over $600 a year had better plan on paying taxes. If you were an employee, your company would withhold a portion of your wages for Social Security and Medicare taxes. When freelancing, it becomes 100% your duty to make sure Uncle Sam gets his share of your income for Self-Employment Taxes.
It's up to you to calculate what you should set aside and then force yourself to save that money until tax time. And let's face it, hardly anybody is good at saving money. In fact, 70% of your fellow Americans couldn't cover an unexpected $500 expense tomorrow. So don't feel too bad, you're definitely not alone.
It's important to know what taxes self-employed workers need to pay and when. You're going to have to file your annual income return but also pay quarterly taxes. The quarterly taxes are for your Medicare and Social Security. W2 employees pay these too but the employer picks up a portion of the tab and the taxes are taken out before it hits their bank accounts.
As a freelancer or small business owner, it can be quite tempting to reinvest all the income you receive. It can also feel like you have more money than you really do. Who has to pay quarterly taxes? In general, you'll have to pay if you're self-employed and expect your tax liability to be more than $1,000 for the year.
One thing we've consistently heard from freelancers is that it's so much easier to have your money for taxes in a separate account than your checking, savings or business expenses. You can do this by yourself if you choose to. That does involve sitting down once a week (once a month or whenever you get income) and calculating what percentage should go to your tax savings account.
Solutions like Painless1099 can make saving for taxes much easier by automating the savings process. It can automatically calculate how much should be withheld from each check, setting that portion aside, and sending what's safe to spend to the user's checking account.
With this tool, freelancers wouldn't have to worry about spending Uncle Sam's cut of their income because it would be out of sight and out of mind until it's time to pay him. This would help ensure the user isn't slapped with an unexpected tax bill at the end of the year because they haven't been saving.
Similar to automatic mileage logging apps like MileIQ, these automatic saving solutions enable you to focus on your business while making sure the tedious – yet necessary – tax tasks are being taken care of.
This is a guest post from Painless1099, the world's first automated tax withholding solution for the self-employed! It built the service in order to address the pain of self-employed saving for taxes. It's offering free withholding for life for users who get onboard and deposit income during our beta.