When my husband and I first moved in together and combined our finances, we decided to break up our responsibilities.
He does the cooking, I clean the dishes; he does the laundry, I take care of the plants, etc. On the financial side of things, I got saddled with handling the taxes.
At first, it was a pretty easy responsibility. I’d been doing my own taxes for years (with help from my CPA mother), and taking on my husband’s didn’t complicate things much further. To be honest, cleaning the dishes was much more of a pain.
Then we decided to quit our jobs, move to a new state and start working as freelancers.
Since then, I’ve learned much more about how taxes work than I ever would have imagined. It’s been a confusing process, but at this point, I feel confident enough to help any of my freelancer friends who are struggling to figure it out.
If you’re also trying to make sense of how taxes change when you’re self-employed, hopefully, I can help you too.
Why Our Taxes Are Different
Before my husband and I quit our jobs, I only had a vague idea of how self-employed people managed their taxes. Even though I’d been freelancing on the side since I was 22, I always had a traditional full-time job and filed my taxes accordingly.
When you’re paid bi-weekly by a company, taxes come out of every paycheck. As a freelancer, that’s not the case. If I charge $500 for a project, I get a $500 check. Because of that, I have to send in a check to the IRS four times a year to cover my share of taxes.
Freelancers also technically pay double the amount on Medicare and social security taxes compared to those in regular jobs. When you work as a W-2 employee, your employer pays half of this tax and you pay the other half.
Freelancers and other small business owners have to pay both halves, which is 15.3% of your total salary.
Freelancers determine how much to pay in income taxes each quarter by using a percentage of their income. For my husband and me, it’s 25% of what we bring home after subtracting our business-related expenses.
How We Manage Our Freelance Taxes
Our accountant gave us a spreadsheet to track our income and expenses for each month. Expenses are divided up into categories such as meals/entertainment, online services, contractors and office equipment.
The spreadsheet lets us see how much we earn each month and how much we spend on our business. For every purchase, we make that’s related to work, we deduct it on our taxes at the end of the year.
I track our business expenses in two ways: email and Freshbooks. Anytime I get an email receipt for a business-related purchase, I mark it as “Freelance/Taxes.” I also have our business credit card synced to our Freshbooks account, which is our bookkeeping software.
Every month, I go through the email label and make sure that all relevant expenses are also in Freshbooks. After that, I divided them by categories and enter them in the spreadsheet. Having multiple ways of tracking our freelance costs means nothing slips through the cracks.
How We Pay Our Freelance Taxes
At the beginning of the year I estimated what our income would look like, and from there what our tax bill would be – not the easiest thing to estimate when you’re just starting out, but it gets easier after a year or two. After that, I determined how much we should save every month for our taxes.
I like keeping a separate savings account specifically for our quarterly taxes so the money doesn’t get mixed up with our everyday checking account. Every month, a certain amount automatically gets transferred from our checking account to our taxes-only savings account.
When it’s time to pay the IRS, I transfer the money electronically from that bank account.
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