- Being self-employed can make taxes more complicated.
- Here's how one writer manages that situation and avoids a financial crunch.
- Keeping detailed records can really pay off.
When you're self-employed, you really need to be proactive about your tax situation.
There are benefits and drawbacks to being self-employed. On the plus side, I get to set my own hours and take time away from my work as needed. On the other hand, when you're self-employed, taxes can become quite complicated. Here are four key moves I make in light of that.
1. Pay estimated quarterly taxes on my earnings
When you're a salaried employee, you have taxes taken out of your paycheck every month. This doesn't guarantee you won't owe the IRS any money at the end of the year, but at least you're paying taxes as you go.
When you're self-employed, you don't have taxes taken out of your earnings. Rather, it's on you to pay the IRS during the year so you don't incur penalties. And that's precisely what I do.
Every three months, I send the IRS what's known as an estimated payment. In fact, what I tend to do is set up my estimated payments in advance and schedule them to get paid out of my bank account automatically so I don't forget about them.
2. Set aside extra money for a tax bill
The money I send the IRS every three months is a series of estimated payments. There are different factors that come into play that dictate what my tax bill ultimately comes to at the end of the year. Those include my total earnings, the number of expenses I rack up, and the tax credits and deductions I'm eligible for.
While I try to do a good job of estimating my tax liability accurately, as is the case with many self-employed individuals, I often fall short. And so I make a point to set extra money aside in my savings account each year for tax purposes. That way, if I realize I underpaid the IRS when I file my tax return, I can dip in and pay whatever sum I owe in full.
3. Keep detailed records of my expenses
As a writer, I don't have the same number of business expenses as someone who owns a company and maintains a lot of different equipment. But I do spend some money in the course of doing my work. I have to pay for internet service, for example, and I need to upgrade my laptop every few years.
These are all legitimate expenses I can deduct on my taxes. But I make a point of keeping detailed records so I know exactly how much I'm allowed to claim.
4. Work with a great accountant
Being self-employed is a mixed bag from a tax perspective. That's why it's worth it to me to pay for a terrific accountant. While I could save money by handling tax matters myself, I might make mistakes that cause me to lose money. Or, I might miss out on tax breaks I'm entitled to.
In fact, remember those estimated tax payments I talked about earlier? My accountant helps me calculate them so they're as accurate as possible. There are free tools online you can use in the absence of having an accountant, but since my accountant knows the ins and outs of my personal tax situation, he's able to help me get those numbers closer to where they should be, thereby minimizing the amount I owe when I file my actual tax return.
Self-employment definitely has its perks, but it's important to manage your money meticulously when you work for yourself. And that includes having a solid handle on your taxes. These moves have served me well throughout the years, so if you're moving over to self-employment, make sure to check them off your list too.
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