Tell me if this sounds familiar: You set up your online profile, you start taking on some clients, the money starts coming in, you’re happy, you’re telling friends and family about your new endeavor, and then one of them says, “Sounds great! Just don’t forget to pay your taxes!”
For me, that conversation happened late in 2013 when I was telling my mother about how well my new freelance writing and editing job was. I was playing the role of stay-at-home dad to our twin 1-year-old daughters at the time and my prime editing hours were when the girls were asleep (generally 9 p.m. – 3 a.m., my apologies to any former clients who got the 3 a.m. editing results).
My braggadocio went out in a whiff of hot air as my mom said over the phone, “That’s great, just remember about your taxes!”
Since it was over the phone, I didn’t have to maintain my poker face, only my poker voice (sounds like a great sequel for Lady Gaga). “Of course,” I said. “My taxes, yes.”
Obviously, I had not thought about paying my taxes, which for freelancers should be paid quarterly in estimates to the IRS or all at once before the April 15 deadline. But not only did I have to pay through the nose that year, I also missed out on a ton of deductions that could have brought that cost way down, if only I’d known about how to track the expenses involved in working for yourself.
Tracking Your Expenses–No Receipts, No Write-Offs
The government loves it when you start your own business and work for yourself. You’re adding stimulus to the economy without them having to spend a dime, you’re not leaching unemployment costs, and you’re providing goods and/or services to American consumers – and possibly foreign ones as well – instead of having those consumers go outside the US borders to shop.
Because of this, the government looks kindly on you when it’s time to pay your taxes, but you have to be religiously dedicated to tracking those expenses if you want to guarantee them getting accepted as write-offs. If you just try to ‘guestimate’ how much you spend on advertising, marketing, or supplies and the government decides to audit you…well, you can guess how that’s going to go.
Now you don’t have to hire a CPA to track your expenses. There are plenty of free resources online that will get you the exact same results, without the high cost (including AND CO’s expense tracking feature in the app!). If you want to buy the little visor that only tax guys and poker dealers seem to wear, that’s your choice.
Once you’ve missed out on keeping your expenses, even for a month, you can still file them based on what you do record, but no estimating across the entire year. If you paid $250 for Google Adwords in July, don’t pretend you paid $250/month. You need receipts to back up what you said you spent. No receipts, no write-offs.
Related: 2018 Tax Policy Changes: Should Freelancers Structure as an LLC or S-Corp?
Paying Your Freelance Taxes
If you are handling your taxes the right way, you’ll take a percentage out of every dollar you make and set it aside for your taxes. To soften the blow at the end-of-the-year, you can estimate your taxes based on previous years, and sent them to the IRS in four equal payments throughout the year. But be advised, if you miss the deadlines on the IRS has for each of the quarterly payments, there’s no going back. They’ll still take your money, but it’ll be applied to the next quarter’s payment.
For an estimate of your quarterly taxes, check out AND CO’s quarterly tax calculator.
Not Paying Your Freelance Taxes (Never a Good Idea)
If you’re new to the freelancing game, you haven’t ever worked for yourself before, or you haven’t set aside the money to pay your income tax, you can be tempted to not file a return by April 15.
This is a terrible idea. Let’s repeat that, but with some extra emphasis: THIS IS A TERRIBLE IDEA.
Just ask Wesley Snipes or Willie Nelson. If you know you owe money from your freelancing business, there are two easy ways to deal with it:
- File your taxes and then download a form from the IRS website which allows you to pay off the money you owe in a monthly installment plan. Make it an amount of money you can afford – they’ve agreed to $100 month for me in the past. The IRS will approve you if the monthly amount is feasible – don’t tell them you’ll pay $5 a month – and set you up with a monthly payment like any other bill. The good news is that the payment plan won’t start for a few months so you can save up to make sure you have the funds available.
- File your taxes and ask for an extension. If you do this, you’ll need to send at least some money now, even if it’s just $100. You then have six months to pay the remainder of your balance – that is, until October 15.
The worst thing you can do is nothing. The IRS is willing to work with most people who communicate with them and who are honest and forthcoming in their desire to do the right thing, even if they don’t have the funds to do it immediately.
The ‘free’ part of freelancing makes for a fun lifestyle where your hours, your locale, your wardrobe are really all yours to control. However, when it comes to taking care of the financial end of things you need to be far more meticulous than the average tax filer.