Like far too many freelancers before me, I’ve blown it with the IRS. Several years ago, I got so far behind on taxes that the IRS threatened to put a lien on our house. My wife still remembers the day we received the notice via certified letter. I’d later get another certified letter when failing to respond to an IRS fine in a timely fashion.
I’m hardly alone. As a group, self-employed workers are watched more closely by Uncle Sam. It’s highly recommended that taxes for independent contractors and freelancers should be handled quarterly. But there are ways to make that tax burden easier (and so you can avoid the April panic). A little diligence goes a long way in reducing headaches and helping your freelance business flourish. Here are three steps I’ve taken, and a fourth I’m trying hard to add:
1. Set up a separate tax account.
We spent years trying to just keep enough in our business account to handle taxes when they came around. But other expenses would always come up, and I’d tell myself that I’d make up the difference next month. Don’t fall into this trap. Set aside a sum every month for taxes in a separate account and leave it there until it’s time to pay the bill.
2. Pay half your earnings to taxes.
Even better, try saving half your earnings as an independent contractor. I’ve never been able to save quite this much, but had I, I’d have never run into trouble with the IRS in the first place, since the top federal tax rate is still under 40 percent. Just as when you file in April and receiving a refund, it will be a nice treat if there is money leftover at the end.
3. File new payments monthly if you can.
Filing payments monthly has proven to be the most helpful strategy for me. Instead of waiting to pay a massive chunk each quarter, our accountant has set up a regular monthly schedule of deposits to both the feds and the state. Each payment is made electronically on or before the 15th, taking a bite out of the quarter-end and year-end bills — and, in the process, reminding me that not everything I earn as a freelancer is mine to keep.
4. Ask a freelance friend to recommend their accountant.
Finally, it’s worth it to get a great accountant. Some of the trouble I had with the IRS those years ago was due to accepting some bad advice from a well-intentioned but somewhat detached accountant who wasn’t a freelance expert. I needed someone who could practically automate the process of managing payroll and quarterly filings and keep me honest. A freelancer friend recommended his guy, and four years in we’re back on track.
Dealing with the IRS is never easy, and taxes can and will feel like a burden if you wait to handle the inevitable payments and paperwork. So, don’t. Keep a separate tax account where you’ll stash up to 50 percent of your freelance earnings for taxes. File payments monthly. And most of all, get a good accountant who knows the ins and outs of taxes for independent contractors like you. You can’t escape Uncle Sam, but you can keep him at a safe distance.