Everybody loves the idea of freelancing and being their own boss. They picture days spent in comfortable pajamas, working from the comfort of their own couches whenever they feel like working. The reality of freelancing is very different.
Sure, if we had the national income that Scott Smith has proposed, that might be possible. Unfortunately, as he says in his book, we’re still citizens of a time when the material economy and monetary economy are at odds with each other. What does that mean for you? It means a lot of hard work and a lot of scrimping and saving because once you go freelance, you are solely responsible for every aspect of your finances, including your taxes.
That’s right: that happy little tax return you got when you were someone else’s employee? That’s likely going to go away for a while. Why? Because when you were someone’s employee, your employer had to pay part of your tax burden for you. Now that you’re freelance? It’s all on you.
Doing Your Taxes
You have basically two options where your taxes are concerned. If you are a math person or someone who enjoys figuring out minutiae, you can track your own expenses and do your taxes yourself. If you are not a math person and don’t want to or think you can deal with all of the details involved in making sure you pay your taxes correctly, you should hire a CPA to make sure your taxes are done correctly each year.
Paying in Advance
Freelance taxes are also different in that instead of waiting until the end of the year and paying everything in a single lump sum, you’re supposed to pay into the tax pool quarterly. How much you pay in will depend upon your sales/income. If you wait until the end of the year and want to pay everything at once that’s allowed, but you’ll be charged some hefty fees on top of what you already owe. Plus, if you pay too much in when you’re submitting your quarterly estimated tax payments, you’ll get a refund!
How Much to Set Aside
The best way to make sure that you’re paying enough into the system is to set aside money from every payment you receive. Find out how much you’ll need to pay in federal taxes (they have tables to help you figure this out) and state taxes (where applicable). Then set at least that much aside from each payment. And when we say set it aside, we mean that in a literal sense. Set up a separate account for your tax savings/payments. This way you won’t be tempted to spend what you have now and earn it back later–which is pretty much the freelance equivalent of shooting yourself in the foot.
Scrimping and Saving to Make Ends Meet
It’s true that working from home and starting up your business out of your spare room or garage is much cheaper than it would be to rent an office space or storefront and deal with all of the costs involved there. At the same time, you’ll likely find that there are some expenses that you hadn’t considered. For example, your power bill will likely rise, your grocery bills will increase, etc. Thankfully there are a few things that you can do to mitigate these costs.
Go as green as possible. If you’re working from your home office, work from that space and leave the rest of the house dark. And, since you are at home, you can go that extra mile and do things like wash your dishes by hand, hang laundry to dry, etc. Green isn’t just about your home, it’s also good for your business. Use solar chargers for your phone and tablet. Be as paperless as possible, etc.
Work at the library. There are going to be times when you have to get out of the house. Most freelancers will head straight for their favorite coffee shop. If you do this a lot, those costs really add up! Instead, set yourself up at a table in the library. The space and the wi-fi are free, it’s quiet and you can bring in your own snacks.
Downsize. We don’t mean that you need to move, necessarily. But downsize your lifestyle. Go through your home and weed out the clutter–sell the items you no longer use or want and put the profit into savings. Downsize your grocery bill by buying in bulk. Shop for clothes at secondhand shops. You know the drill.
If you’re careful and you mind your details, you should be able to pay your taxes in full and on time without having to live on ramen again.