Hyden, Miron & Foster, PLLC Law Blog

Tuesday, December 22, 2020

How to Budget for Taxes as a Freelancer

It seems as though more and more people are beginning to set off on their own and make a living with freelance work. There are others that freelance in addition to a part-time or full-time job. Regardless, freelance workers need to remain aware that they are subject to taxation just as they would be at a regular hourly or salary type of job. Failure to properly budget for a tax bill can put freelance workers at an extreme financial disadvantage. There are, fortunately, ways to plan for the freelancer tax bill to avoid this situation.

How to Budget for Taxes as a Freelancer

With the freedom that comes with being a freelancer also comes responsibilities, such as budgeting for taxes so that you can pay the Internal Revenue Service (IRS) what they are owed at the end of the year. This responsibility rests solely with the freelancer. In more traditional employment scenarios, the employer is responsible for withholding taxes from an employee’s paycheck. With freelancer workers, the freelancer himself or herself is responsible for calculating the tax burden and setting aside adequate funds to cover the tax bill.

It can, however, be difficult to determine how much taxes you will owe as a freelancer because you do not necessarily have a constant earning stream. As it stands now, the self-employment tax is 15.3% of the first $137,700 in income received. There is an additional 2.9% imposed on anything that surpasses this threshold. Freelancers must budget for both income taxes and FICA taxes. Because of this, freelance workers should plan to set aside about 25-30% of taxable income to pay quarterly taxes as well as any other taxes owed when taxes are filed in April.

To budget for tax bills, there are several options. A freelancer may choose to set aside money every time payment is received or set aside a set amount from the total made from the month as calculated at the end of the month. There is also the option to estimate what your earnings will be for the year at the start of the year. Calculate what 25-30% of this figure is and then divide it by four. This is the number that you will pay to the IRS each quarter in estimated taxes.

The IRS receives regular payments throughout the year from taxes withheld from paychecks. Because freelance workers are not in this situation, they must make estimated tax payments to the IRS throughout the year. There are quarterly payments you will be responsible for making to the IRS every three months. Failure to make these quarterly payments promptly may result in additional tax penalties. It should also be noted that, while you must make these quarterly tax payments, you must also file your taxes by April 15th in the following year. In adding up your estimated tax payments, you will then be able to figure out whether or not you owe the IRS more money or whether you will be entitled to a tax refund.

Tax Law Attorneys

At Hyden, Miron & Foster, our knowledgeable tax attorneys are here to provide dedicated legal support. Whether you are a salaried employee, hourly employee, freelancer, or are self-employed, we can help. Contact us today.

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