How to Budget for Business Taxes
April 1, 2009 by Allison Boyer
Filed under Jobs
As a freelancer, you don’t get paid in the same way as an employee. As you’ve likely noticed, clients don’t take taxes out of your check whenever they pay you, like happens when you’re on a payroll. That doesn’t mean that you don’t have to pay them, though. While many people get refunds this month when they get their taxes done, you’ll owe them 
if you earned money freelancing in 2007. New to freelancing for 2008? Let me sure with you a really great way to make sure you’re prepared to pay the tax man this time next year.
First, when you get your taxes done this year, talk to your accountant (or the guy at HR Block, whatever) about federal, state, and local rates. Every state/local tax rate is different, so the percentage you’ll pay is slightly different from what I pay here in Pennsylvania.
Instead of thinking about that as a lump sum of your total annual income, think about it as a piece of every check you get. The best way to make sure that you don’t spend the money is to pay yourself first every time you make a deposit into your account.
If you don’t have one already, open a savings account. Although you do want to look for a good interest rate, I find it much more convenient to open the savings account at the same place you have your checking account. That way, you can transfer money freely and, in most cases, online. Be careful, though, to check how many times you can transfer money to and from your savings account without penalty, as some banks impose limits.
When you get paid for a job, automatically take out the percentage you’ll need to pay for taxes and put it in your savings account. If your bank has limits or you don’t want to open a savings account, you can also write a check to the IRS every time you get paid. Of course, you don’t have to mail all those checks when it comes time to pay your taxes – you can rip them up and write one big check instead. The point is this: every quarter, you need to have enough money to pay your taxes. If you fall behind just a little, it can be hard to recover.
Paying taxes stinks. You can’t escape it, though, so you need to be prepared. Pay your own savings account first so that you can pay the government later. You can check out Kelly at TaxGirl for tons of great tax-related information.
Are you a long-time freelancer? Leave a comment below to tell us how you budget to pay your taxes.
Image via sxc.hu.
Could you do a follow-up article on quarterlies? A lot of new and accidental freelancers would appreciate some info about when you need to pay quarterlies, how you do it, when you need professional advice from a business banker or an accountant–that sort of thing.
Jennifer – absolutely! I’ll put together the information and post about it this weekend!
I always do more or less what you’re suggesting here. I determine an approximate percentage which should be guaranteed to cover taxes (and therefore is a slight overestimate) and then take that percentage off every months profit (income minus tax-deductable expenses) and put that aside in a “tax fund”. Anything left over can then be spent how I see fit. When the tax bill comes I can then just pay it from the money set-aside for the purpose. Usually I have set aside more than required (just in case), so when the tax bill comes I actually get a *bonus* for myself from the surplus.
me too.
Back when I was really making money at this (sigh) I made it a business rule to put away 30% of every check I received. I then bought short term CD’s to generate some income from the deposits until the tax payments come up. (My accountant figured out how much I had to send in quarterly, based on my income the year before.) At the end of the tax year, if there was more money in the account than I needed to pay my taxes, I could then use those funds as my IRA contribution for the year. ( Now if only that was not disappearing!)
Thanks. I can’t wait!
Putting the extra in an IRA is an awesome idea!