Freelancer’s Guide to Fall Tax Planning
Hey friends! Happy Fall Y’all!
You know what that means right?!
Pumpkin Spice Lattes. Shades of Red, Yellow, and Orange. Pumpkin Patches. Hay rides. A hot toddy by the fire. ALL THE BEST THINGS!!!
In my opinion, Fall is the BEST time of the year! It’s the perfect time to make new memories with friends and family and reflect on the nostalgia of the season!
Here in Seattle, Fall gives you some of the best hiking in the mountains– great weather, sunshine, and beautiful foliage. 👀 🍁 🍂
But it’s short-lived. Soon seasonal rain will come to spoil the sunshine as we prepare ourselves for a winter of drizzle and cloudiness.
The deep despair of the season that soon follows the fall time, reminds me of all the things I’m not particularly looking forward to. You know– things like…
TAXES.
Sorry to kill your buzz, Ron– Taxes aren’t my favorite thing either. 😒 🤓
BUT– as a freelancer, my fall tax planning has been a game changer in helping me prepare for and avoid any nasty surprises around tax time!
It’s a small price to pay for Freedom. 😏
So let’s chat about tax planning. We’ll try to make it fun, and if you stick with me through the end, you’ll be at the top of your tax game!
Here’s what we’ll cover:
How to approach organizing your tax files
Things to consider in estimating your tax liability
Common tax strategies for freelancers
The very first thing you should do to help you prepare is to “KonMari” your tax organization!
How to organize your tax file
Three years ago, I was introduced to the KonMari Method™ and the book, the life-changing magic of tidying up. And it DID change my life! Well… sort of.
Okay, let’s just say I continue to selectively apply the principles to very few specific areas of my life!
One of those areas is taxes. 😬
Taxes were a BIG stressor for me when I first started as a freelance writer.
When you work for someone else, you don’t have to worry about payroll withholding or estimated taxes– they do it for you!
But since I wanted to be fully in control of my time and my money, I had to figure all this out on my own! By having a system of organization in place, I no longer had to worry or be distracted by my taxes.
Here are three things you can do to organize your taxes:
1. Create a Tax File Folder for your email and desktop.
This is as simple as it sounds. Create a folder on your desktop that tracks all your business receipts, tax forms (1099s, 5498s, 1098cs, etc.), and create a subfolder for each tax year.
Do the same for your business email account. This allows you to find tax-related emails/receipts in a jiff!
2. Create a spreadsheet that tracks your monthly income and business expenses.
This will not only help you track the growth of your business, but it can also be a place that tracks your eligible business deductions like car mileage, business dinners, software purchases, etc. This is something that you should be comfortable forwarding to your accountant at year-end to make filing quick and easy!
3. Keep all of your receipts.
Have a process or physical folder for all of your physical receipts from business-related expenses. Because most of us get email receipts, I recommend that you scan and save your physical receipts in your tax folder on your desktop as well.
Things to consider when estimating your year-end tax liability
One very important thing to note when starting as a freelancer is that you are obligated to pay estimated taxes on your freelance income.
Since most of us are charging our clients per project, we are responsible for making sure that we track all of our tax obligations. This will include Federal, State, and Self-Employment(Payroll) taxes on our income.
When your accountant files your taxes, they will use your last year’s income to determine how much you will pay in estimated taxes for this year.
If you have a growing freelance business though, your estimated payments may not cover the total amount you owe by the end of the year. 🤔
That’s why, in the fall time, I like to check where I stand with how much I might owe when I file my taxes.
If you are not into math, then skip this next section and call your accountant for help! 🤓
Here’s how to do a rough calculation of your year-end tax obligations:
There is a two-part (very rough) calculation that will help you very closely arrive at your final estimated tax liability. Let’s get started!
Look at your total business income year-to-date and estimate what your year-end income will be
Then subtract all of your deductible business expenses that you’ve made or expect to make by the end of the year.
Then subtract your self-employment tax deduction ((business income- deductible expenses) x .0765 employer FICA tax rate)
Then subtract your expected pre-tax retirement savings or health savings contributions ($6,000 IRA contribution + $3,650 for my HSA = $9,650 total)
Finally, Subtract your personal “standard deduction” ($12,950 for single, or $25,900 for joint filers)
Whew! Now you’ve calculated a rough estimate of your “Modified Adjusted Gross Income (MAGI)”! Congrats!
But wait– there’s more!!! Stick with me, we are almost through. It will be worth it, trust me!
Next, you’ll tally up your total taxes! Here is how to approach it:
Add your total self-employment tax (business income - deductible expenses x 15.3%)
Add your federal tax amount using your MAGI calculation above and a federal tax table, like this one from NerdWallet
Add your State Tax by using your MAGI calculation and your state tax table from taxfoundation.org
Now if you followed these steps, you’ve arrived at your total tax due. Compare this to what you’ve been paying in estimated taxes to determine whether or not you need to set aside more moving forward.
Pro tip: To determine how much to set aside for taxes on new income through the end of the year, I divide my estimated tax due by my estimated total business income.
For example, If my total estimated business income was $96,000, and my estimated tax due was $22,994, then I know I need to set aside about 24% of my new income for taxes through the end of the year.
Common Tax Strategies for Freelancers
Have some cash sitting on the sidelines and want to find more ways to reduce taxes? 🤑
Here are a few ideas for you to reduce taxes with deductible spending before the end of the year:
Max out your pre-tax traditional IRA
Make a tax-deductible investment in a course
Invest in your business by upgrading your computer hardware or software
Pay a designer to take your freelance website to the next level!
Set a budget for advertising expenses for your services
Pay a professional for help with your business (you can deduct expenses for accountants and attorneys)
I can’t recommend enough the value of working with an accountant specializing in freelance or small businesses. A good CPA will help you make the most of your money!
All right you cool cats. 🐈⬛ 😎 You’ve almost earned yourself a glass of your favorite adult beverage. But first…
YOU WILLLLL download your free finance roadmap so you can organize the crap out of your money.
Alright, now you can enjoy! 🍷🍹 🥃