Indianapolis Web Design Blog

5 Things I Wish I Had Known About Freelance Taxes: Part 2
< Read Part 1

It’s easy to understand that you’ll have to pay taxes all of your life. But how much?
At your old job, you didn’t have to worry about that too much. You received a periodic paycheck with the deductions already taken out. Now, that you are your own boss, no money is being withheld from your freelance income. Now you have to put some of your income aside all on your own.

I have to admit, this was really unpleasant for me. When I make $100, I’m not really getting $100, I’m getting less! The whole concept of taxes became a lot more real and important when I held the $100 in my hand, and knew that it was only worth about $50 to me.

First, there are general guidelines here in the U.S. that we can use to see how much we will owe. If you look up the tax brackets for the current year, you can see the tax rates. As a freelancer, you probably don’t know how much you will make in the coming year, so it’s a little more complex.

If you are in your second year, then it’s easy to know how much: just figure that you’ll be able to match your previous year. But, count on doing a little bit better. After all, you’re better at what you do this year, with new ways of working faster, earning more, and getting more clients. You don’t want to be caught short at tax time, so playing it safe is a good way to go.

Let’s say that you figure you might make $50k this year. Adjust that up $65k in case the coming year goes better than expected. Looking at the tax schedule, you can see that you’ll owe $8,440 plus 25% of the amount over 61,300. I would just play it simple and hold out the 25%, but you can do the math and get it exact. Just be sure to hold out a little more than you think you’ll need.

Also, don’t forget to add in the self-employment tax. This money goes to Social Security and Medicare, and is 15.3% of your taxable income. This is the amount that your employer paid into your social security when you had a job… now that you’re the employer, you have to pay it!

Total amount held back? 40.3%. That may sound like overkill, but it is most definitely better to be on the safe side! You can never go wrong by saving too much money… and your business may do better than you think - and owe more taxes than you think. Plus, the money held back can earn you interest. I recommend putting the money in some kind of money market savings account until you have to pay it.

Holding back the money for tax time is not enough, you have to pay as you go, This is called “Estimated Taxes.” I’ll talk about that in the next installment.

This blog post is not intended to be specific tax advice. For tax advice, go consult a professional.

Part 3:
What are “Estimated Taxes,” and how much should you pay?

This entry was posted on Tuesday, February 6th, 2007 at 8:14 pm and is filed under Freelance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.