Freelance Finance

Mire and I used to sweat out the tax season, living in fear that our accountant’s verdict would throw us in debt for years to come. But we don’t fear tax season anymore. Why? Because we’ve starting doing something many freelancers don’t, namely, save to pay our taxes. While not as glamorous as saving for a vacation in Aruba, saving for taxes eliminates the stress you may be feeling as the calendar creeps ever closer to April 15th. Here’s how to pull it off.

Think back to the days when you may have had an employer. What happened every time you got your paycheck? The government took its share first, before you even saw the check. While most employees gripe about this every payday, they cannot deny that it is remarkably convenient. Uncle Sam swipes the cash before they have a chance to blow it on a flat-screen TV. The biggest concern a full-time employee has come April 15th is whether or not he or she will receive a refund or not.

In the freelance world, things are not so convenient. When you’re paid, you receive the full amount you’ve earned, and the luscious fullness of that payment does funny things to your mind. You think: Wow! Finally, I’m getting what’s really mine! Well, sorry, it’s not entirely yours. Some of it is Uncle Sam’s too. If you don’t set aside his share in a specially defined tax fund, you will most likely blow through that cash and have problems come tax time. How to avoid the pain:

1. Find a good accountant. A good tax accountant is worth his weight in shekels. Ask the accountant: “What percentage of my pay should I set aside for state and federal taxes?” Don’t worry. He or she will know. She’ll calculate it based on your history of earnings and deductions.

2. Be Prepared to Be Shocked. Your accountant may well throw out a number you find unpalatable or outrageous, such as 20 or 30 percent. But before you fire the number-cruncher, realize that employed people have anywhere from 15 to 30 percent of their pay lopped off each check for taxes. Depending on their benefits package, they may lose up to 40 or even 50 percent of their pay to pay for health insurance, the company gym, and to fund their 401k. Silly you: you thought being freelance meant living off 100 percent of your earnings. Think again. Most people live on 60 percent of their pay. You should too.

3. Bank That Percentage! In a separate bank account, start saving that amount from every check you receive. Four times a year, you will make disbursements from this account to pay your estimated and annual taxes. Stay in touch with your accountant during the year, tell her how much you earned in each quarter, and ask her to tell you how much you should pay. If her suggested percentage was on the money, you should have no problem paying your taxes. In time, the process will actually be fun. Or at the very least, painless.

4. Revel in Your Luck. Freelancers are undeniably lucky when it comes to taxes, though very few see it, realize it, or appreciate it. The average employed person is never allowed to touch his whole paycheck. The money Uncle Sam whisks away is gone forever. But you? You belong to a vast confraternity of men and women who actually are able to make money off that money. It’s true! For an average of three glorious months, until you need to pay your estimated taxes, you are permitted to earn interest on what you sock away in the tax fund. Until you shell it out to Uncle Sam—and we suggest waiting until the last second to cut that check—that money and the interest it generates is yours. So leave it untouched in that account and let it grow. Cubicle Joe and Jane don’t have that luxury.