7 Budgeting Hacks Freelancers Should Live By

Creating a financially secure life can feel daunting at the best of times, but it can feel nearly impossible for freelancers. Budgeting for freelancers can feel like navigating an uncharted wilderness without a GPS. You’re probably going to get lost and eaten by bears.

Except the bear, in this case, is the IRS, which also stands for “I’m Running Scared” from bears.

All jokes aside, your financial goals, budget, and savings are very important for a budding freelancer. You need to plan for today, so you can figure out the direction you’re heading.

Preparing in advance has its positives. 92% of Americans say that “nothing makes them happier or more confident than when their finances are in order.” You can be one of those American’s if you follow our comprehensive budgeting for freelancers guide. Let’s get started.

7 Freelance Budgeting Hacks:

When it comes to budgeting, it’s better to cannonball into the pool than dip your toe in. Let’s begin your finance journey by brainstorming your short and long-term business goals.

1. Set short-term and long-term goals

Building financial security is an ongoing juggling act. Whether you can accomplish your goals now or later doesn’t matter; you have to keep your balls in the air at all times.

At the same time, you need to consider if it’s better to change your short-term goal into a long-term one. For example, it’s entirely possible to turn your freelancing solo career into a full-fledged agency on a shoe-string budget, but it would be easier to build up some capital first.

Keep your goals list next to your financial program or documents. That way, you’ll always be reminded of exactly what you’re budgeting towards. To set your expectations, ask yourself:

  • Do I want to invest more in my business?
  • Am I saving for a rainy day?
  • Can I save enough in a year to buy an office?
  • How much of my income do I want to put towards family planning?

As a rule, keep your short-term goals to daily, weekly, or monthly achievements. A short-term monthly goal can range from 1-3 months. A long-term goal can be anything beyond that.

2. Use invoices and software to track earned income

Whether you’re an analog accountant or a QuickBooks aficionado, you need to track earned income. The easiest way to do this is by making electronic invoices with accounting software.

Why? For several reasons:

  • You’re freelancing from your computer anyway, so why switch to analog?
  • You’re likely filing your taxes electronically, and you need invoices as proof of income.
  • You need to check your bank balance through your computer or phone.
  • It’s faster to input your financial information in software that populates everywhere, from your mobile phone to your payroll to your clients and finally, to the taxman.

If you ever plan to scale your freelance business, it’s vital to get into the habit of tracking your income and filling out invoices. Once you become a business entity, you absolutely need invoices to prove your income to the IRS. There’s no ifs, ands, or buts about it.

To set up your invoices with budgeting in mind, use a freelance invoice app. Seriously, any of the ones featured on our list will do, but we’ll focus on our top pick, Hectic, for a few reasons.

Hectic is an all-in-one client and project management software that comes with a calendar, accounting functionality, and the ability to make invoices, contracts, and proposals. What makes Hectic budget-friendly is its ability to calculate lifetime earnings across your projects. You can read an in-depth review on Hectic here.

Since most freelancers don’t have a steady paycheck, especially when they start, calculating your total lifetime earnings can help make budgeting less of a rollercoaster ride.

3. Make sure your method includes multiple income sources

Although some freelancers will stick to one gig, several others will compile multiple incomes or passive income streams to make ends meet. For this reason, your budgeting method must include several income streams, or you may forget to add them to your taxes.

If a freelancer is selling digital products and does a bit of dropshipping on the side, it won’t be easy to keep these two businesses separate. It becomes even more complicated if you’re dealing with different currencies. Financial software just makes this whole scenario simpler.

Freelancers who don’t have multiple income streams will still benefit from setting up their infrastructure early, especially if your long-term financial goals include saving.

Even with software, it’s still possible to mix up your personal and business purchases.

4. Open a separate account for your business

You absolutely have to do this if you make a significant amount of money from your freelance income. Remember that budgeting for freelancers includes saving money for taxes (more on that later). If you have a separate freelance bank account, you can easily budget and plan for tax season.

Some freelancers will set up a different e-wallet where clients will deposit payments. This option is great for new freelancers, but as you scale, this option may become expensive or bulky. E-wallets often charge a fee per invoice, so it’s better to open a separate checking account.

5. Start setting your freelancer salary expectations

We know freelancers can’t always control how much they’ll be paid per month, but they have complete control over their contract terms. Being able to properly save starts before your client signs the contract, so set deadlines for when they need to pay you and charge late fees.

While it may sound harsh to charge interest on a late payment, think of it from another perspective. Every day you’re not paid is another day your bills inch closer to being overdue.

What happens when your bills are overdue? You’re charged interest. Why? To encourage you to pay.

To budget effectively, you also need to encourage your clients to pay.

However, you can’t start charging interest after your client signs the contract because there’s no incentive to pay it. Make a point of explaining incurring interest fees to your clients. Once they see that you’re serious about getting paid on time, you’ll reduce late payments once and for all.

6. Calculate your fixed expenses

You’ll always have to pay your rent and utilities, but your fixed expenses are unique to you. If you consistently spend the same on groceries, insurance, debt, and dry cleaning, you can account for how much money you’ll have left for savings, business growth, and entertainment.

What you do as a freelancer will also determine other fixed expenses. A freelance writer may have to pay a subscription to Grammarly monthly, while a graphic artist has to fork over money for Photoshop. Required business expenses also must be included in the “fixed” category.

7. Think and plan in three-month increments

If you’ve been a freelancer for less than a year, it will be harder to look at a yearly snapshot of your expenses. Whether you’re a newbie or a veteran, it’s a good idea to plan your budget in three-month increments. There are a few reasons for doing this:

  • Once you make enough money, the IRS will expect you to pay your taxes quarterly.
  • You’ll have a more accurate indication of your average earnings.
  • You can see where your “famine” months are and plan accordingly.

Let’s say your 3-month average is $3000 per month. That means you’ll approximately make $9000 every three months and $36,000 per year. Since 25-30% should go towards your taxes, that means you’re left with $25,200 for your budget, or $2,100 per month of usable income.

Presuming that 20% goes towards saving, you’ll need to live off 50% of your paycheck, so $1,500. Keep in mind that this number isn’t static; you can adjust your budget as you go.

It’s a good idea to make a “dream budget” first and adjust if you’re way off. Once you create a budget, you need to watch it closely. Otherwise, you could find yourself in a lot of debt.

Don’t forget about freelance taxes

Learning how to do taxes as a freelancer is one of the most difficult steps to becoming independent. In the previous section, we touched upon how 25-30% of your income should be saved for taxes. This is important because your revenue will come to you “tax-free.

How to save for self-employment taxes

At the end of the year, you’ll need to pay off your tax burden to the IRS if you make more than $400 in self-employment income. If you make less than $400, you’ll still need to claim it.

The self-employment tax rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare. An additional 0.9% is added once you reach beyond a threshold amount.

If your tax burden is more than $1000 at the end of each quarter, you’ll need to submit quarterly returns. If you’re unsure if your business meets these requirements, use an estimated self-employment tax calculator. Knowing this information in advance will save you from audits.

While 25-30% sounds like a lot of money to save, this percentage is just an estimate. It’s better to save more than less if you’re short one month and can’t contribute to your taxes.

Freelance deductions

One of the best parts about budgeting for freelancers involves the many ways you can save money. Freelancers can deduct the following from their taxes:

  • Home office expenses
  • Internet and phone bills
  • Health insurance premiums
  • Business meals and travel
  • Vehicle use
  • Loan and credit card interest
  • Publications and subscriptions
  • Education
  • Business insurance
  • Rent (from office space)
  • Startup costs
  • Advertising
  • Retirement plan contributions

If you keep all of your receipts and itemize your transactions, you’ll be able to take advantage of your deductions and save even more money. You can use your tax “refund” for anything, but it’s recommended that you put the money back into your business or your savings.

Budgeting for freelancers & saving at the same time

When making a budget, it’s essential to consider the amount you’ll put towards savings. Ideally, 20% of your income will go towards preparing for your personal and professional future. We’ll break this concept down into different “cushions” or “pots” that you should pay into.

Rainy-day fund

Set up a separate savings account where you can throw $10-$100 dollars in each month. This account should be easily accessible. Your rainy day fund is meant for smaller expenses, like paying for a flat tire, fixing a broken window, or other unexpected, short-term costs.

Emergency fund

Your emergency fund is for financial emergencies, including job loss, major illnesses, or injury. Aim for an emergency fund of at least three to six months of living expenses, including debt payments, everyday spending (groceries), and rent/utility bills.

Health and dentistry fund (tax-deductible)

You’ll need to put some money into your health, dental, and qualified long-term care insurance if you aren’t eligible to participate in your spouse’s plan. If you do pay this cost, you’ll be able to deduct your health insurance as well as your spouse’s and your dependent’s premiums.

Retirement fund (tax deductible)

Budgeting for freelancers includes saving for retirement because you won’t have an employer who sets up an IRA or 401(k) for you. You also won’t have an employer that matches your contribution. However, anything you contribute to your plan lowers your tax burden.

Freelancers typically opt for the SEP-IRA, SIMPLE, and solo 401(k), but you can also pay into a pension or guaranteed income annuities. For now, stick to an IRA and/or 401(k) because they’re the easiest to manage. You may want to open a high-interest savings account to save more.

Investment fund

At some point, you may be interested in investing in stocks, bonds, and mutual funds. However, you have to make sure you know what you’re doing. If you want to invest in the market yourself, search for quality data-driven stock research websites that cater to beginner investors.

On the other hand, you could hire an investment broker if you have some spare change. Either way, you can build your investment portfolio to help save for your retirement. Fill your portfolio up with government bonds and low-cost stocks specifically for long-term investing.

Business insurance fund (tax-deductible)

It’s important to set aside money to protect your physical business (home or otherwise) from natural disasters or theft, but you may also need car, credit, and business liability insurance. Most business insurance is tax-deductible, which eases the upfront cost of business protection.

Business costs fund (tax-deductible)

Keeping a “rainy-day fund” specifically for your business can help you replace items like computers, software, or printers if something goes wrong. The business costs fund should not include any fixed costs unless you’re investing in education to improve on your credentials.

Business expansion fund

As you start to expand your client base, you can add more money to this fund. Budgeting for freelancers can get complicated if you’re only focused on expansion. In the beginning, it’s a good idea to approach growth slowly and invest here when you have a bit of money left over.

Why budgeting for freelancers is important

budgeting for freelancers

There’s a comfort in a fixed salary. You’ll know exactly what you’ll make every two weeks, making budgeting a breeze. If you know your fixed expenses equal X and your guaranteed income equals more than X, then you’re guaranteed to never fall short. In theory.

Why fixed income earners come up short

But having a fixed income doesn’t necessarily make you a better budgeter, saver, or investor. In fact, it may backfire in some cases, especially if you have more money to spend.

60% of millennials making over $100,000 a year live paycheck to paycheck. This suggests that salary has very little to do with how much money you’ll take home at the end of the week. It’s clear to see that having a competent budget is the key to building long-lasting wealth.

How a variable income can actually be helpful

Whereas someone who makes a fixed salary can brush themselves off and start saving, freelancers don’t always have that option. One lean month could put them in severe debt.

When you truly don’t know what you’ll make from month to month, you’re more compelled to make a budget just to be safe. On the other hand, fixed salary earners tend to take that for granted. Living like you have a variable income is the best way to prepare for the worst.

What’s more, a variable income can help you prepare for the best. If you want to scale, a budget can help you keep some money aside for expansion, meaning you’ll have fewer lean months.

Freelancers must budget for a level they can reach

Salary earners often operate with a false sense of security, but freelancers are aware that their position isn’t secure. The last thing they want to do is budget at a level they’ll struggle to reach.

A higher paying job should lead to more money in the bank, not to more stuff. Therefore, a freelancer’s “cushion” comes from various pots of money, such as a travel fund, rainy day fund, emergency fund, and anything else. Anything leftover can then be used for fun or expansion.

As entrepreneurs start to earn a more stable income, budgeting for freelancers includes filling in those cushions. Otherwise, you may have to give up your freelancing gig for employment.

Budgeting is easy, struggling is hard

Creating a budget can be a pain, but do you know what’s way worse than that? Struggling between paychecks. At the same time, it’s hard to see the light at the end of the tunnel.

While it’s true that budgeting will take up a lot of upfront time, that’s just because you haven’t developed “financial tracking” as a habit. Budgeting for freelancers becomes second nature with a bit of practice; you just need to use the right tools and follow the right guide.

But you’re already at the right guide; now it’s time for you to do the rest. Still, we’re here to help. There are plenty of guides on Millo that focus on getting your freelancing career up and running, so it can start on the right foot. Then, you’ll be in a great position to scale.

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Millo Articles by Jessica Perkins

A growth hacker at heart, Jess helps SaaS companies rapidly scale their inbound leads through lean marketing strategies. She views content marketing and advertising as the perfect concoction of growth, and loves to write about her insights and experiences.
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How to Do Taxes As a Freelancer the Right Way

If you are one of the roughly 59 million gig workers in the US, it is up to you to be familiar with every aspect of running your own business. Of course that includes the skills that got you into business in the first place, like designing, writing, coding, accounting, etc. But it also includes the less fun pieces of entrepreneurship like writing proposals, invoicing, and of course, paying taxes.

And taxes are stressful.

Figuring out how to do taxes as a freelancer has added complications, like multiple 1099s, self-employment regulations, quarterly deadlines and tracking expenses. Add to that the whiplash of an ever-evolving tax code, and you may start to feel like understanding taxes is impossible.

If you’re stressed about filing your taxes this year, there are an abundance of resources available to help you decode the tax code. In this article, we’ll walk you through some of the considerations in determining and scheduling tax payments and give you some tools to help.

Determining if you have to pay taxes as a freelancer

Before you ask how to do taxes as a freelancer, you have to ask yourself if it is even necessary. If you are just getting started in business or if freelancing is more of a hobby for you, there’s a chance you don’t even owe taxes.

For all self-employed individuals, once you have earned $400 or more, you must start paying taxes on that income. Even if you earn less than $400 from an individual client, if your total income is above that threshold, you must pay taxes on it.

You should receive a 1099 form from each client you work with (more on that later), that will help you in filing taxes, but it’s vital to track your own income with detailed reports so that you can compare your earnings with what clients report.

To be clear, even if you earn less than $400, you may still need to file a tax return. If you have other income sources, if you have earned money through gambling or prize money of any kind, receive child support payments, are earning interest on investments or or have credits to claim, among other reasons, you still need to file a return. If there’s a question, go ahead and file. The IRS will not charge you if your income does not meet the guideline, and you may even be entitled to a tax credit or refund.

To ensure you know how to do taxes as a freelancer and are filing the correct forms, you may consider consulting a professional or using a handy tracking tool like Keeper Tax.

When to pay your taxes

For most people, taxes come around once a year.

When learning how to do taxes as a freelancer, you will find it is a bit more complicated—because of course it is. That familiar April 15th deadline still applies, but in some cases, freelancers also owe an estimated quarterly tax.

If your total tax payment is likely to be more than $1000 at the end of the year, you fall into this quarterly tax payment group. The payment depends on a variety of factors, including your individual income, your household income, and the state you live in.

It sounds like a lot, but it’s really not as complicated as it sounds. You can use an estimated tax calculator to determine a ballpark estimate of your quarterly payments and learn more about how to do taxes as a freelancer.

If quarterly payments concern you, there are also a couple of ways to help manage them.

  1. Credit overpayments from the previous year. If you are eligible for a tax refund, you can elect to apply that amount to your next year’s taxes. You should definitely consult a tax professional before going this route, because it is complicated and not always the right choice. However, it can help alleviate some of your tax burden and lower your quarterly payments for the coming year.
  2. Withhold tax payments from W2 income. If you have a full-time job, or if your spouse is paid on a W2, you can elect to have extra tax withheld from their paycheck. This form of payment supersedes quarterly payments and you can rest easy until the April filing deadline.

How to do taxes as a freelancer in 7 steps

So now you know if you need to pay taxes, and you’ve calculated your quarterly payment schedule. Let’s get into the details of how to do taxes as a freelancer.

Determine your business structure

Freelancers can set up their business a few different ways. The two most common are a sole proprietorship and an LLC. A sole proprietorship just means a single individual (you) runs a business (your freelance income).

An LLC is a bit more complex and requires official paperwork to set up. The main benefit of incorporating as an LLC is to limit your tax liability. LLC actually stands for limited liability company. As the owner of an LLC, you are doing business separate from your personal finances.

What does this have to do with learning how to do taxes as a freelancer? If you are operating under an LLC, you’ll file taxes under the LLC and pay those taxes from a separate business bank account. As a sole proprietor, you use your personal name and bank account to file your return. So it’s important to know the pros and cons of both and how to make the shift if needed.

Understand freelance taxes and forms

If you’ve held a job as a working professional, or even took a high school economics class, you are probably familiar with W4s and W2s.

Freelance taxes have a whole different set of paperwork and procedures associated with them. So you’re fully armed with the knowledge of how to do taxes as a freelancer when tax season rolls around, let’s go over the highlights:

  • 1099-MISC: The 1099 form is to a freelancer what the W2 is to a full-time, benefited employee. A 1099 is sent to you by clients for work that exceeds $600 annually. You’ll start to get 1099s in January––businesses are legally obligated to send these forms out before February 1st, so you should have paperwork from all of your clients by the middle of February. If you don’t and you believe you should, it’s time to start making phone calls.It’s very important to save all of your 1099 paperwork. Exactly how you do taxes as a freelancer is up to you, but keeping organized files will be a life-saver when it’s time to file.
  • Schedule C: The Schedule C, or Form 1040, is the bread and butter of how to do taxes as a freelancer. This is the form you use to report income or loss from any business, whether you operate as an LLC or Sole Proprietor. If you have more than one business, you need to file a Schedule C form for each one of those entities.On the Schedule C, you’ll enter your gross revenue, any refunds you’ve granted, interest earned, tax credits you have already received, expenses, commissions, fees, payments you have made to employees or other contractors, property depreciation estimates, insurance premiums, mortgage payments for a business property (not your home), legal and accounting fees, maintenance costs, and certain taxes and licensing fees.That’s a lot of information that you need to have prepared ahead of time. Whether you hire a professional or take the task on yourself, using an expense tracking app can make the process a lot easier.
  • Self-employment taxes: When you work for someone else as a payroll employee, the company you work for is required to withhold Medicare and Social Security taxes from your paycheck each month. This money helps fund those programs, and allows you to draw from them as you age.If you are self-employed, these taxes are not withheld, so you owe them on the back end. That is essentially where self-employment taxes come from. Unlike income tax, self-employment tax does not apply at the state level, so this portion of your tax is fairly predictable. Budget for 15.3% of your earnings for this federal tax.

Stay on top of your finances throughout the year

This is the most important part of knowing how to do taxes as a freelancer the right way. It is nearly impossible to submit an accurate tax return without accurate records and receipts.

Your best bet is to use simple accounting software to track income and expenses as you go. This way, nothing gets left out and you have all the paperwork you need to back up your claims at the end of the year.

Have a dedicated business bank account

If your business is an LLC, a separate bank account for your business is a legal necessity. But for sole proprietors, it might still make sense.

Having a dedicated bank account is an easy way to track all income and expenses, since the bank will keep records for you. It also provides some financial protection, and allows multiple people to manage the business finances as you grow.

Understand all of your possible tax deductions

As a business owner, at the same time you report your income, you can show the IRS how much it costs to run your company, and you won’t owe taxes on those expenses.

Taking these write-offs is essential in helping you keep your hard-earned money and allowing you to invest further in your business.

In addition to physical expenses, you can deduct certain things like car mileage, meals, your cell phone and internet expenses (as they relate to your business), and a home office.

I could write an entire article on expenses alone, but here are some of the most common ones to consider.

Consider hiring a tax professional

If you haven’t figured it out by now, taxes are fairly complex. Just as you are an expert in your field, accountants are experts at what they do. They generally have a college degree and certified CPAs have to take a difficult test and keep up with the latest laws and trends in order to maintain their license.

Filing your own taxes is a good way to save money if you are just starting out or only wondering how to do taxes as a freelancer so you can continue a side hobby. However, as you scale your business, working with a professional bookkeeper could actually save you money in the long run, since they will help you catch all of your deductions and avoid fines if you miss a payment.

Think about retirement

While you’ve got a CPA on the line to talk about your taxes, it might be a good time to sort out your retirement options. Odds are you don’t want to work as a freelancer forever, and without an employer-sponsored 401k, you need to take on the planning yourself.

Set aside money each month for taxes and retirement. You can set up automatic payments to separate bank accounts or sub accounts of your personal and business accounts, so this earmarked money will be saved before you even see it.

There are tax benefits to both a 401k and IRA accounts, so be sure to review those options and decide what works best for you.

Ready to tackle your taxes?

Most of us spend a decent amount of time wondering how to do taxes as a freelancer, especially as you’re starting up your business.

While there is a bit of a learning curve, taxes are not something that should keep you from pursuing your freelancing goals. With a bit of research, careful bookkeeping, and potentially some outside help, you can tackle self-employment taxes and find a lot of satisfaction in working on your own.

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Millo Articles by Kylie Burgener

Kylie Jackson Burgener is a mother of three and a freelance consultant, specializing in public relations, writing and content marketing. She is a cofounder of Measured Melodies, a leveled piano sheet music system for piano teachers and students. She lives in Raleigh, North Carolina with her family.
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When are Quarterly Taxes Due? + Answers to All Your Quarterly Tax Questions

With most freelancers, quarterly taxes are deeply misunderstood. While knowing answers to questions like “When are Quarterly Taxes Due?” may seem like a huge pain, the truth is quarterly taxes help you out at tax time.

Not only does knowing when quarterly taxes are due keep you from getting creamed by a large tax bill, but quarterly tax payments also even out your cash flow, which means you won’t drain your bank account all at once.

Here’s what you need to know about when quarterly taxes are due so you can go from dreading them to using them to stabilize and grow your freelance business.

What are quarterly taxes?

Quarterly taxes, also called estimated taxes, are quarterly payments you make towards your annual tax bill. Since you don’t know how much your tax bill will be until you file your taxes, your quarterly taxes are due throughout the year and are estimates of what you’ll owe.

Your quarterly tax bill includes taxes for Social Security, Medicare, and income tax. Knowing when quarterly taxes are due and paying them ensures your money gets divvied up between these buckets and subtracted from your annual tax bill.

When are quarterly taxes due?

For most freelancers, this is the critical question: when are quarterly taxes due?

Quarterly taxes are due four times a year. The dates when quarterly taxes are due are:

  • January 15
  • April 15
  • June 15
  • September 15

If any of these days fall on a weekend or a holiday, then quarterly taxes aren’t due until the following business day.

Answers to the top 8 questions about your quarterly taxes

1. How much money do you have to make to file quarterly taxes?

If you think your annual tax bill will be more than $1,000, then you’re on the hook for quarterly taxes. This is the case for all entities except C corps. If you’re a C corp, then you’ll have to file quarterly taxes if you think you’ll owe more than $500.

How do you know if you’ll owe more than $1,000 in taxes? Your taxable profits, filing status, and personal tax credits all impact your tax liability.

Each of these is unique to the individual, so it’s impossible to give a hard and fast rule about how much money you have to make.

If you’re unsure if you’ll owe more than $1,000 at tax time, here are some questions to ask yourself:

  • Is your business profitable? If not, and your business is taking a loss, then you won’t have any profits to tax and don’t need to pay quarterly taxes.
  • How much did you owe last year? If it was more than $1,000 and your income and expenses are consistent, you’ll likely need to file quarterly taxes.
  • Do you have new tax credits or a new filing status that will impact your return? If you’ve had significant life changes that affect your filing status or tax credits, it’s a good idea to talk to a tax preparer about your potential tax liability.

2. Who has to pay quarterly taxes?

If you’re self-employed and your business is relatively profitable, then you’ll need to pay quarterly taxes.

For businesses with one owner, like a sole proprietor or single-member LLC, the owner will file quarterly taxes.

For businesses with multiple owners, like a partnership, multi-member LLC, and an S corp, each owner will file quarterly taxes if they think they’ll owe more than $1,000 on their share of the profit.

For a C corp, both the business and the shareholders will file quarterly taxes. The company will file quarterly taxes based on its taxable profits, and the owners will file quarterly taxes based on their dividend payments.

Here’s a summary of who needs to file quarterly taxes:

Type of business Individual files quarterly taxes Business files quarterly taxes
Sole proprietor X
Single member LLC X
Partnership/ Multi-member LLC

X

(each member or partner files quarterly taxes)

S corp

X

(each shareholder files quarterly taxes)

C corp

X

(each shareholder files quarterly taxes)

X

3. How do I calculate my quarterly taxes?

There are two ways to calculate your quarterly tax payments: the Mathlete way and the Slacker way. Here’s what each method looks like:

Mathlete:

The Mathlete method is definitely the most precise way of figuring out your estimated taxes. You take all factors that affect your tax liability into account using the worksheet in IRS Form 1040-ES and doing a series of calculations.

The drawback? You have to rely on the IRS written instructions which is like slogging through the Eternal Bog of Stench. Turn back, Sarah. Turn back.

If you’re adamant about getting into the nitty-gritty of calculating your estimated tax payments, this is the method for you. But, if you’d rather watch The Ring on repeat than deal with 15 lines of math, move on.

Slacker:

The Slacker method is less accurate, but way easier. With this method, you divide what you owed last year by four. Those are your quarterly tax payments.

Here’s an example: If you owed $20,000 in taxes last year, this year you would pay $5,000 each quarter.

$20,000 / 4 = $5,000

The great thing about this method is, besides ditching the math, it protects you from incurring a penalty. If you pay at least 100% of the tax you paid in the previous year, even if you end up underpaying, you’ll avoid an underpayment penalty.

The drawback of this method is that it’s only accurate if you have consistent income year to year. If your business goes through a growth spurt, you might avoid a penalty, but you’re still going to owe a lot of extra money come tax time.

4. How do I figure my estimated payment if my income fluctuates?

So what happens if your income changes drastically from year to year? Or you’re a new business and have no idea how much money you’ll make? There are two ways to figure out your estimated payments.

Annualize your income

Annualize is just a fancy of saying that you’ve projected your future income based on what you’ve already earned.

Here’s how it works:

  1. Calculate your taxable profits year to date.
    1. Example: It’s May and your year to date net income is $45,000
  2. Divide your total year to date taxable profit by the number of months in your year to date income. This is your average monthly profit.
    1. Example: $45,000/ 5 = $9,000
  3. Multiply your average monthly profit by 12. This is your estimated annual taxable profits.
    1. Example: $9,000 x 12 = $108,000

After you have your estimated taxable profits, you’ll get down with your bad Mathlete self and use the worksheet in IRS 1040-ES to calculate your quarterly tax payments.

Pay based on your real-time income

The second method is to pay your quarterly taxes based on what you’ve earned in real time. The way it works is that, for every period that you’re paying your taxes, you make a payment that is 25-30% of your taxable profits.

For example, if you’re paying quarterly taxes on April 15, you’ll calculate your taxable profits from January 1 – March 30. Then, you multiply that amount by 25-30%. That’s your quarterly tax payment.

Here’s an example: You have $30,000 in taxable profit in the first quarter of the year. You multiply that by 25%. Your quarterly tax payment is $7,500.

$30,000 x 0.25 = $7,500

The benefit of this method is that you coordinate your tax payments with your cash flow. When you make more money and have more cash on hand, your payments are higher. When you make less, your payments are lower.

when are quarterly taxes due

5. How do I make sure I have enough money for my quarterly taxes?

The biggest reason people blow off their quarterly tax payments is that they don’t have the cash to pay them. The best way to prepare for your quarterly taxes is to save for them monthly.

If you have a fixed amount you pay every quarter, divide that amount by three. That becomes your monthly tax savings.

If you’re using the real-time method, every month multiply your taxable profit by 25-30%. That becomes your monthly tax savings.

The last, and most important, step is to transfer your monthly tax savings into a dedicated tax savings account. This ensures that you don’t dip into your quarterly tax payment money and you have the money to stay on top of your payments.

6. How do I pay my quarterly taxes?

To pay your quarterly taxes, you can go old school or go digital.

First you need to note when are quarterly taxes due — don’t be late!

To go old school, write a check and then use the payment vouchers in Form 1040-ES. Don’t skip filling out the payment voucher! It provides the information the IRS needs to apply your payment to your annual tax bill.

You can also pay your quarterly taxes online through two sites, the IRS’s Direct Pay site and the Electronic Federal Tax Payment System (EFTPS).

The IRS Direct Pay site only accepts payments from a bank account. The EFTPS accepts payments from a credit card, but you’ll pay a 2% processing fee.

7. Will I get a penalty if I don’t pay my quarterly taxes?

Yes, the IRS turns into a mean girl if you don’t pay your quarterly taxes. So mean that you’ll pay a penalty on the money that you owe. Refer to when are quarterly taxes due above, and make a reminder for yourself.

The 2019 penalty is 6% of the total amount owed for the number of days your taxes remain unpaid. Sound confusing? It is, and so are the calculations.

You can learn more about how the penalty works, and how to calculate it, in IRS Publication 505- Tax Witholding and Estimated Tax.

8. What if I don’t pay enough towards my quarterly taxes?

Just like you’ll get hit with a penalty if you don’t pay your quarterly taxes, you’ll also pay a penalty if you don’t pay enough towards your quarterly taxes.

The underpayment penalty rate is still 6%, but this time the penalty paid is on how much you underpaid.

The IRS isn’t always such a Heather, though. You won’t be penalized if you pay at least 90% of your total tax liability through quarterly payments.

Also, if you pay 100% of your previous year’s tax liability through quarterly tax payments, you’ll avoid the underpayment penalty.

The only caveat is if you earn more than $75,000 as a single filer or $150,000 as a married filer. Then you’ll need to pay 110% of the previous year’s tax liability to avoid a penalty.

Just like Steve Urkel was the breakout star of Family Matters, your quarterly tax payments could be the breakout star of your finances.

Next year at tax time you could be celebrating a stress-free tax season with a pre-paid tax bill, leaving you enough cash in the bank for that accordion you’ve always wanted.

when are quarterly taxes due

Navigate your quarterly business taxes with ease!

Whoa, that’s a ton of information. Feeling like your mind is blown? We don’t blame you! It’s hard to navigate quarterly taxes; never mind as a freelance business owner!

Everything rushes through your mind….when are quarterly taxes due? How much do I owe? How do I calculate my quarterly taxes? It’s a lot.

If you’re pushing hard and managing your clients and business, getting help to have your business run on autopilot can be incredibly helpful.

Using accounting tools like QuickBooks, Bench, Bonsai, and Hyke can help you manage your ‘books’ and rather than using the back of the napkin calculations, you can ensure you’re paying the exact right amount of quarterly taxes.

These tools act as your dedicated accountant and bookkeeper to ensure you get the support you need.

Avoid the 6% penalty

Everyone wants to save money come tax time, but they aren’t all well-versed in strategies that will allow them to do so, especially when they’re focused on running their companies and earning an income.

Thankfully, by being an informed freelancer, and accessing using modern business and financial technologies, you can be a savvy freelancer, not only when it comes to the actual work that you do, but also when it comes to saving more money and using it to grow your business.

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Millo Articles by Andi Smiles

Andi Smiles writes for Hyke, the online service that helps freelancers save in taxes. She’s a small business financial consultant and coach who teaches business owners to take control of their finances.   hyke More about Hyke: Hyke is a technology startup based in San Francisco. Founded by two long-time freelancers, Hyke’s mission is to help freelancers save in taxes every year, so they can afford better health insurance or invest in retirement, and never have to worry about legal or tax paperwork for their business. Check out their tax savings calculator for freelancers.
Read more from Andi.

5 Business purchases to make before the end of the year

It’s the holiday season and you’re probably already feeling super-strapped for cash. However, now’s one of the best times of year to make business purchases.

Why?

Because Christmas sales tend to drive prices down AND you can potentially decrease this year’s tax bill with deductions to boot.

But before you go spending your entire savings account, remember this rule of thumb:

If you need it, buy it now. If you don’t need it, don’t buy it.

Not sure if it’s a “good” purchase? Read more here:

You also need to know these few technical details:

  • The payment must be recorded on or before December 31. (It’s not good enough that you’ve received the invoice.)
  • You don’t actually have to have the item(s) in hand.

Okay, so let’s get to purchasing!

**Note: I’m not an accountant, and while in general this is sound advice, you should always check with your accountant or financial advisor on how best to minimize your tax bill.**

1: Electronics

If you need a new computer, laptop, cell phone, tablet, printer, Wacom tablet, etc., now’s the time!

Electronics historically get discounted severely for Christmas and post-Christmas sales to make way for next year’s models.

2: Software & apps

Get that latest version of creative software, upgrade your operating system, renew your MailChimp (or similar) subscription, or purchase that productivity app you’ve had your eye on.

3: Office furniture and décor

This includes desks, chairs (super-important to find a comfortable one!), art, storage, shelving, and the like.

4: Office supplies

Usually these are pretty small purchases, but every little bit helps.

And don’t forget about printer ink, which can add up if you purchase enough for the entire year (even if that’s only 2 cartridges!).

5: Marketing

If you’re going to be purchases spots in publications or having a new website created, pay for it now!

Not only will you get the deduction on this year’s tax bill, you’ll also force yourself to go through with it instead of putting it off because you’re too busy.

Why this makes sense financially

You might be saying, “What about next year’s tax bill? Aren’t I just kicking that can down the road?”

YES. Yes you are.

But that’s kind of the whole game in taxes: pay the least in taxes you can this year, and worry about next year next year.

The hope is eventually something will come up (like needing a new car, for example, or a change in the tax code) that will erase a few years of pushing the tax bill off.

[Tweet “Pay the least in taxes you can this year, and worry about next year next year. #businesstaxadvice”]

How are you minimizing your tax bill this year?

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Millo Articles by April Greer

April is a freelance designer with a rare combination of creative expertise and technical savvy.
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How to find, hire, and work with a great accountant

It can be expensive to work with an accountant. Do you really need one? And what, beyond filing your tax return, should you use them for?

If you’re serious about growing your business, the right accountant can help you make long-term strategic financial decisions. They can also help with

  • lease negotiations,
  • cash and treasury management,
  • ongoing tax reporting,
  • and financial planning.

They can even help you change business structures.

How to find an accountant that’s right for you

The best advice we can offer is to work with someone who really gets your business.

(Why should you listen to us? We’re Bench.co – we specialize in professional bookkeeping services for your business.)

Ask contacts in your industry to refer you to their recommended accountant or accounting firm. Once you’ve secured a few leads, arrange to meet each accountant for an initial consultation.

Here’s what you should assess during your meet and greet:

They understand your business: An accountant who works predominantly with clients in your particular industry will hold specialized, up-to-date knowledge that could help you take advantage of tax breaks and deductions available to your business. They’ll also know how to navigate your type of business through any changes in tax law as and when they happen.

They get past the jargon: Tax regulation contains a lot of technical language. Find an accountant who can explain high-level tax topics in an accessible way. A pro who helps you understand financial topics more deeply will teach you to better understand and manage your own business.

They can handle your business needs: Depending on the size and complexity of your business, you may require a strong team to dedicate themselves fully to your business’ needs and work directly with you on high-level business planning.  Make sure whoever you choose to work with has the capacity to handle your present and foreseeable future accounting requirements.

How much does an accountant cost?

Many accountants charge by the hour. Some work on a monthly retainer. And accounting costs can vary greatly depending on the level of service provided.

Accountants will generally offer you a free consultation to discuss your business’s needs before you decide to work with them, so be sure to ask about fees up front. This is also the best time to determine how frequently you’ll need to work with your accountant. Again, depending on the size and complexity of your business, you may need to meet with your accountant yearly, quarterly, or even monthly.

Ask for quotes from a few different accountants and compare your options. It’s also a good idea to ask for a total yearly estimate based on the price they quote you.

On average, the cost of professional tax preparation in the U.S. falls somewhere between $220 (filing a Form 1040 for a self-employed individual) and $800 (filing a Form 1120 for a C corporation). While it may be painful to shell out that kind of money for taxes, think of the time and stress you’ll save yourself by hiring a professional.

What’s more, a tax pro will help you take advantage of financial opportunities, deductions, and tax benefits you may have previously missed. These savings alone can end up saving you more than what you’ll pay in accounting fees.

How to work with your accountant

Here are some tax-specific topics your accountant should cover with you. They’ll help you work together effectively and ensure you haven’t overlooked anything before filing your next tax return.

(If they don’t, bring up these topics and start interviewing new accountants for next year!)

Deductible business expenses and how to maximize deductions

Costs that are ordinary and necessary to running your business are fully deductible as business expenses. Your accountant will consult on whether you qualify for certain deductions and find ones you may have missed.

While many business expenses are fully deductible, some are only partially deductible. Examples include food and beverage costs, and anything with mixed use (home office, cell phone, internet connection). Your accountant can sort out the deduction for each item based on the percentage you use it in your business versus personal life.

Good accountants will schedule a tax planning meeting or phone call prior to year-end to ensure you maximize your deductions and thus lessen your tax bill.

Health insurance deductions

As a self-employed person, your health insurance premium is a deductible expense. However, if you participate in your spouse’s employer’s insurance plan, you can’t deduct the cost of a different plan you opted to pay into instead.

Your accountant can elaborate on these rules and determine whether your plan qualifies as a deduction.

Changes to tax regulations that affect your business

Most accountants are required to spend a certain amount of time each year studying and understanding tax regulations.

Good accountants will contact you when tax regulations that will affect your business change and counsel you on how to leverage the changes to your advantage (or to less disadvantage if the changes negatively affect your business).

How your business’ legal structure affects your tax filing

Your accountant should help you understand what, if any, tax requirements are unique to your business’ legal structure. (If you’re having trouble understanding them, don’t worry: we’ve been there, too. Don’t be afraid to ask questions or go over it until you do understand.)

Good accountants will also discuss with you when changing structures will help you get a better tax return.

Final thoughts

In addition to filing a great tax return, working with the right accountant on a long-term basis can lead to faster growth and ongoing financial success. It’s a business investment that requires time, effort, and money to get right, but in the long run it’s one you’ll be glad you made.

  • Do you have an accountant you love?
  • How have they helped your business succeed?
  • What made you select them?

OR

  • Do you have any additional questions or reservations regarding hiring an accountant?
  • What has prevented you from hiring an accountant thus far?
  • At what point would you consider hiring one?

Share your two cents in the comments!

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Millo Articles by Cameron McCool

Cameron McCool is the Content Manager at Bench, the online service that pairs you with a dedicated bookkeeper and simple, elegant software to do your bookkeeping for you.
Read more from Cameron.

The best last-minute purchases for major tax savings next year as a freelancer

The end of the year is upon us, but that doesn’t mean it’s too late to save a little bit of cash next spring on your freelance business taxes.

We want to help you rack up as many tax deductions (free money!) as possible before the end of the year. To help you do just that, here’s a list of last-minute United States tax deductions commonly available to creative entrepreneurs.

We’ve also included the IRS* tax form to list each deduction on (you can find links to download all of the necessary forms at the bottom of this post).

*The Internal Revenue Service (IRS) administers and enforces United States federal tax laws. For other countries please refer to your government documentation.

No matter where you’re located, make sure you’re deducting as much as you can before the year ends!

Online services

Did you know any fees paid for online services related to your work are tax-deductible? Anything you use to manage or grow your business can be deducted saving you major cash come tax time.

Examples and options include:

Invoicing Software

If you’re still invoicing using spreadsheets or InDesign docs, it’s time to upgrade to a better invoice app. And doing it before the year’s end could mean major savings for you. Here are our top recommendations:

Project Management Software

There are lots of great project management software options for freelancers & entrepreneurs. Signing up for an annual plan before the end of the year will guarantee your biggest deduction (sometimes as high as $400 or more).

Here are a few we recommend grabbing before the end of the year:

Domain registrations & Web Hosting

If you’ve been debating whether to register that new domain or not, now’s the time to do it since you’ll be able to reap tax deductions if you pull the trigger before the end of the year.

We recommend the following registrars:

Bookkeeping Software & Services

Keeping your finances organized is another great way to improve your business next year. We recommend the following:

  • Bench — Bench pairs you with a team of bookkeepers and a snazzy app to ensure you know how your business is doing at all times.

Other Software

There are loads of other software you can get deductions for. Here are a couple more common examples:

Keep in mind, you may need to amortize these expenses as start-up costs if your business is new.

Home office

If you work from home, you can take advantage of the home office deduction. To qualify for this deduction, you need to meet three conditions:

  • Exclusivity: Your home office must only be used for business activities. Have clear boundaries between this area and the rest of your home.
  • Regularity: Use this space on a regular and predictable schedule for your work.
  • Precedence: The majority of your time spent on work-related projects must be in this area.

There are two ways to calculate this deduction: the simplified method and the standard method.

Simplified method – Schedule C (1040)

For the simplified method, create a standardized deduction of $5 per square foot of your home office, with up to a maximum of 300 square feet.

Standardized method – Form 8829

The standardized method requires you to calculate the percentage of your home office by dividing the area used for business by the total area of your home.

Advertising

Form: Schedule C (1040)

The cost of promoting your business is a deductible expense. Keep track of expenses related to business cards, printed promotional materials, online advertising, project submissions and contests.

As long as these expenses are necessary and ordinary to promote your business, they are generally fully deductible.

Education

Form: Schedule C (1040)

Expenses you incur for education that add value to your business or increase your skill level are fully deductible. Examples include:

  • Classes to improve skills in your field
  • Seminars and webinars
  • Workshops
  • Subscriptions to trade or professional publications
  • Educational books

Costs that don’t qualify in this category are expenses related to education for a new career or education that is not related to your current work.

Computer and phone

Form: Schedule C (1040)

If you use your computer and phone solely for business purposes, you can fully deduct these costs as a business expense. However, if you use them for both business and personal uses, you can only deduct the business usage percentage of the total cost.

Depreciated costs – Schedule C (1040)

Computers and phones are also depreciated costs, and you can claim the depreciation of your computer and phone under “Depreciation.”

Note: calculating depreciated costs can be tricky to get right, so it’s best to work with an accountant or tax professional when claiming this deduction.  Learn more about this topic in Bench’s guide to understanding depreciation.

Internet and phone calls

Form: Schedule C (1040)

The cost of your internet connection is a deductible expense. This cost is fully deductible only when it’s purely a business internet connection. A home-based internet connection is only partially deductible based on the percentage used for business purposes.

Calculate this as the percentage of your total internet bill used for business purposes. It may be helpful to record the number of office hours you worked.

The same applies to the cost of your phone bill; you can only deduct a percentage of the total cost of your cell phone bill based on how much it was used for business purposes. For instance, if you use your cell phone 60% for business and 40% for personal purposes, you can deduct 60% of the cost of your cell phone plan as a business expense.

Keeping an itemized phone bill is a good way to support your claim should you ever be audited.

Travel

Form: Schedule C (1040)

Travel expenses are tax deductible as long as they are ordinary and necessary for your business.

To qualify for the deduction, the business trip must be outside of your tax home, which is defined as the city or area in which you conduct your business. You also need to be traveling away from your tax home for longer than a normal day’s work, requiring you to sleep or rest en route.

It’s critical that you maintain well-kept records of all business travel expenses. This includes receipts that detail the amount of each expense you’ll claim, the dates of your trip, details of your trip (for example, who you met, the business purpose of the trip), and a mileage log if you drove your own vehicle.

The following is a list of deductible travel expenses, approved by the IRS:

  • Travel by plane, bus, train, or car to and from your destination
  • Use of your car at a business location
  • Parking and toll fees
  • Cost of taxis or other transportation methods on your business trip
  • Meals and lodging during your business trip
  • Tips
  • Dry cleaning
  • Shipping of baggage and display materials to your destination

Bad business debt

If you weren’t paid by a client during the tax year, you may be able to claim this loss as bad business debt. You must be able to prove to the IRS that you took all reasonable steps to collect the debt, but failed to recover the payment, so keep proper records of all debt collection attempts you’ve made to recover unpaid contracts.

Bad debts can be partially or fully deducted from a business’ gross income. While the IRS provides a full rundown on claiming bad business debt, unless you’re into tax law and excited by factoring complicated deductions, claiming business bad debt is another tricky area where we strongly suggest you work with an accountant to get right.

Insurance

The cost of business insurance and health insurance is, in most cases, fully deductible. Here’s the fine print:

Business insurance – Schedule C (1040)

If your business mainly operates out of your home office, you can deduct the cost of renter’s or homeowner’s insurance off your home office deduction.

Health insurance – Schedule A (1040)

You can deduct the cost of your health insurance plan as an adjustment to income as long as the plan is under your name. If you are eligible to be covered, or if you are currently covered under your spouse’s employer’s plan, you cannot deduct this cost.

Business meals

Form: Schedule C (1040)

You can deduct 50% of qualifying food and beverage costs for your business meal expenses. To qualify, the meal must be a business-related expense so, for every business meal you claim, keep the following records:

  • The amount of each expense
  • The date and place of each meal
  • The business relationship of the person you ate with

A good practice is to record this information on the back of your meal receipt.

IRS forms:

Comments or questions about the best tax deductions for entrepreneurs or freelancers?

Let’s chat through them in the mastermind!

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Millo Articles by Cameron McCool

Cameron McCool is the Content Manager at Bench, the online service that pairs you with a dedicated bookkeeper and simple, elegant software to do your bookkeeping for you.
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