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If you read last week’s post about freelancer taxes, you know that as a freelance consultant, it pays to keep track of your taxes throughout the year, not just in April. But as you also know, that’s easier said than done, especially when you’re crushing it as a new freelancer.
So, how in the world do you stay on top of your taxes while running a successful consulting business?
Make quarterly estimated tax payments
First, let’s quickly review: What are quarterly taxes? And why do you need to file them?
Quarterly tax payments are required for every taxpayer in the US. As an employee, employers withhold taxes from each of your paychecks, then send that money to the IRS four times a year. As a freelance consultant, you’re both the employee AND the employer, and you get to make your own quarterly tax payments.
Thankfully, these are not full-blown tax returns, they’re just payments, but the IRS can add a penalty to your tax bill if you don’t make them on time. They’re due on the same four days every year -- April 15th, June 15th, September 15th, and January 15th, in that order. Yes, we know they don’t match calendar quarters. It makes no sense, but hey, it’s taxes.
Now that you know why and when to pay, how do you know how much to pay? The answer unfortunately is not as simple as we’d like. Income tax is an annual number, so to make estimated payments, you have to estimate your total tax bill for the year, then divide it by four.
The tricky part is that your income can fluctuate throughout the year, especially when you’re a freelance consultant. That’s why we recommend getting help from a professional who understands the tax cycle and how to plan for it.
Keep track of your books
As we like to say here at Mylance, whether you’re operating as an LLC, an S Corp., or even a Sole Proprietorship, you’re running a business. And a business needs books.
Not only will a good set of books inform your cash flow decisions, but it will ensure you’re always prepared for tax time. There’s no better way to keep track of your money each month.
There are a ton of bookkeeping software options that will help you stay up to date. Personally, we love QuickBooks Online. In fact, we include it for free as part of our bookkeeping subscription.
The point is, the more often you can look at your books, the more you know about your taxes, and the less of a stressor they become. But what if you’re too busy conquering the world to count beans all the time?
Hire a bookkeeper who knows freelancers
Look, we know, it may sound like overkill at first. But think about it; as a freelance consultant, your time is quite literally your money. We’ve found that our customers save 8-10 hours per month with Mylance Bookkeeping. That’s thousands of dollars each year, added straight to the bottom line.
In addition to time saved, you’ll want a bookkeeper who understands the unique challenges freelancers face. As a self-employed consultant, your business income directly affects how much tax you pay, and you have access to dozens of write-offs that may not apply to other businesses.
Our job at Mylance is to help you maximize these opportunities. We do that by providing monthly updates on your income and taxes, so you know what to expect without any unwelcome surprises. We’re not just robots either; instead of just showing you a bunch of numbers, our goal is to help you understand those numbers, so you can plan ahead and have peace of mind. That’s what the freelance work life is all about.
IRS CIRCULAR 230 DISCLOSURE: To comply with requirements imposed by the Department of the Treasury, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written by the practitioner to be used, and that it cannot be used by any taxpayer, for the purpose of (i) avoiding penalties that may be imposed on the taxpayer, and (ii) supporting the promotion or marketing of any transactions or matters addressed herein.Our use of a disclaimer does not change the high degree of care and attention that we devote to our tax advice. Moreover, the inclusion of the disclaimer does not indicate that penalties could be imposed on the transaction at issue, but rather merely indicates that the advice we have provided you in such communication does not preclude the IRS from asserting penalties. Finally, please be assured that the use of such a disclaimer to avoid unnecessary legal expenses is similar to the approach adopted by most other tax practitioners.If you have questions about the new U.S. Treasury rules, please do not hesitate to contact us.
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I specialize in helping businesses-of-one and start-ups achieve financial and tax compliance while saving them tens of thousands of dollars each year.
