As a freelancer, you’re probably very creative. Whether it’s photography, graphic design, video work or software coding – these are all creative jobs. And if you’re like us you’d probably rather spend as much of your time as possible on your creative work and as little as possible on the actual running of your business!
If you’ve been making a living as a creative soul for any length of time, you already know the business part is just as important as the actual creative work you do. Neither can exist without the other. But for most creative people, the business part is a burden they’d rather not have to bother with. And when it comes to paying your taxes, that’s the biggest downer of all.
But, we have good news! We are going to show you how to make paying taxes a breeze. I’m not talking about making calculating your taxes a breeze because that’s pretty well taken care of with bookkeeping and tax computing software. The problem most freelancers have with taxes isn’t so much the bookkeeping part as it is the coming up with the money to pay them part! And that’s what we’re going to help you learn to do.
Why Taxes are Such a Nightmare for Freelancers
When I first started freelancing, taxes were a nightmare for me. The first year I did not plan properly and the consequences of that poor planning dogged me for years. The first couple of years I didn’t make enough to owe anything in taxes. Which was fortunate because I didn’t have anything left over to pay taxes with! And when you’re just getting your freelance gig off the ground, that’s often the case. But those early years can often set you on a path to sloppy habits that can take many years to clean up.
Knowing that I wasn’t making enough to owe any taxes in those first few years, created a bad habit in that I did not learn to plan or save for taxes. It took several years of getting farther and farther behind on tax payments before I finally realized what I needed to do to get things straightened out. And it was so simple I kicked myself for not doing it much sooner.
As a freelancer it’s easy to feel all your income has to be spent or saved for your own survival. It’s natural to feel that you simply never have enough left over for taxes. But all it takes is a little forethought, planning and discipline to get yourself to the point where you actually do have the money you need available at tax time.
Doing Your Own Withholding – Made Easy
As a self-employed freelancer you hopefully know by now that you have to do your own withholding for taxes. You have to set aside money on your own to pay future taxes with. This is without a doubt one of the scariest things about working for yourself. Freelancers dread it, because we never feel we have enough money on hand to make ends meet anyway, so how are we supposed to set any of it aside to pay taxes 12 or 18 months down the road when we have to pay rent now?
When you’re full-time employed by somebody else, they do all this for you. If you earn $1,000, when you get paid you may only see $600 of that. The rest, the company sends off to the tax man and you never see it. It’s never in your pocket so it’s very easy not to spend it. The goal for us freelancers is to create a situation that comes as close to that as possible. In other words, we want to create a situation that separates us from the money we’ll owe in taxes as quickly and as cleanly as possible.
Co-founder and CEO of HoneyBook, the business management platform for creative entrepreneurs, Oz Alon told Gigworker,“The very best way for creative freelancers to get on top of their taxes is to take a set percentage of every client payment and immediately put it into a separate bank account and pretend you never saw it.” This, he says, makes coming up with the money for your tax payments a breeze.
Set up a Tax-Savings-Only Bank Account
So, the key is setting up a separate tax-savings-only bank account. Then come up with an estimated percentage of your income that you will owe in taxes for the year. It may be 25% that you and your accountant decide is the most reasonable amount. Then every single time you get paid, put 25% into your tax account.
I have my tax account setup at the same bank as my business account so I can easily transfer money from the business account into the tax account, and every time I get paid, I transfer the estimated amount into the tax account. With a little psychology and a little discipline, I convince myself that the money in the tax account is absolutely and completely off limits for any purpose other than paying taxes.
If all your money goes into your main business checking account, no matter how many times you tell yourself a certain amount of it is for taxes, you’ll never be able to save it. When you look at your bank balance and see that you have $2,000 in the bank, you’re never going to remember that $700 of that is set aside for taxes. And if you see something you’d like to buy that costs $1,500 and you know you need another $500 to get you through the rest of the week, you’ll think, ‘Great! I can buy this $1,500 thing!’
But, you really can’t, because after deducting the $500 you need to get through until the end of the week and the $700 you need to have set aside for taxes, you don’t really have $2,000 at all. You have $800. So you could buy an $800 thing but you couldn’t buy a $1,500 thing.
Now, if that $700 is in a totally separate account, then, it’s much easier to see that you only have $1,300 in this account and you know you need $500 for other things so it just makes it a lot easier to see and understand how much money you really have.
Now, if seeing the amount in your tax account makes it too tempting for you to spend it, then I would recommend opening an account at another bank altogether so you won’t see the balance when you check your main checking / spending account.
This system has worked very well for me. Gone are the days when I used to agonize over how I would ever come up with enough money to pay my taxes on time. And gone are the years when I wasn’t able to fully pay them on time. When tax days come now (and you’re supposed to pay quarterly although it’s not an absolute mandate that you do), they’re such a breeze. The money is already socked away and yes, while it hurts to have to see it all go out the window – it just feels so good to know I have it and I can pay my obligations without any stress or headaches.
And don’t beat yourself up too much if occasionally you’re not able to put the full amount into your tax savings account. There will be other times when you can put in more. On occasion I’m not able to put the full amount into the tax account because I need the money for some other pressing need.
But if I stay close to my goal, then at the end of the year I will come very close to having the amount I need to pay my taxes in full. Before I used this system, it was always a nightmare at tax time when I was looking at what seemed like gigantic sums that I owed, and I didn’t have anywhere close to the amount I needed to make the payments. Now I sometimes have a little more than I needed sometimes a little less, but most times it’s just about right. And knowing that really takes all the stress out of doing taxes.