Freelance Finance: Paying Taxes
Here at The Savvy Newcomer we understand that it can be intimidating to talk about money. It’s often a sticky subject, but we feel it’s the first order of business for small business owners. One major component of succeeding as a freelance translator or interpreter is managing your finances well. If you don’t master your money, your translation career won’t be profitable or sustainable. This series on money matters is intended to get right to the heart of some of our biggest questions about freelance finances. We won’t shy away from the tough questions, and we invite you to dive into these topics along with us.
*Disclaimer: We are not financial or legal advisors and the suggestions shared should not be considered legal or financial advice. Check with a professional before making decisions about your business.
Despite being an inevitable fact of life, taxes can be a real nightmare for small business owners and freelancers. Setting money aside from your earnings may not be easy; you’ll need to plan for tax time so you can be prepared well in advance.
Set money aside
Since freelancers in the U.S. typically don’t have money withheld from their paychecks for taxes, they often need to pay quarterly estimated taxes to the federal, state, and/or local governments. These amounts will depend on how much money you owed at each level last year and how much you expect to earn this year. Regardless of whether you need to pay quarterly or not, you can always set aside money throughout the year. The amount of money you should set aside may depend on your location, so you should research suggested percentages for your federal, state, and/or local taxes. Be aware that in the U.S., employers pay a portion of their employees’ social security and Medicare contributions, but freelancers are responsible for this payment themselves (“self-employment tax”). As a result, you may find that the percentage of your income owed in taxes is higher than it would be if you were an employee of a company. Consider opening a savings account in addition to your business checking account so you can earmark money for taxes throughout the year (and maybe it will even earn you a little interest in the meantime).
Track your expenses
As a business owner, many of the purchases you make for your freelance work could be tax-deductible. Track your expenses in whatever way works best for you; at the end of the year, reading through all your bank statements to remember what you purchased may be cumbersome. Consider tracking at least the largest expenses in an Excel sheet or other software and breaking them into categories that may be useful when you are getting organized at tax time. The IRS tax form “Schedule C,” which you will probably use to file your taxes, has predefined categories here that you can use to make tracking expenses easier. Also note any personal expenses you made that could also be related to your business (your office space rent/mortgage, phone bill, utility bills, etc. may be at least partially deductible). Things like mileage on your car, charitable giving, and retirement contributions may also reduce your taxable income, so be sure to track all of these in an easy-to-access location.
I like to use Xero for tracking expenses: in addition to being an invoicing and client management platform, it also connects to my bank accounts so that all transactions are imported into the software, and I can reconcile income line items with specific invoices, plus track and categorize purchases as I make them. When April 15th rolls around, I can export the transactions from the previous fiscal year directly from Xero to help as I prepare my taxes.
Contact an accountant
I prefer to work with an accountant, but lots of freelancers do their own taxes. In any case, I recommend that freelancers at least reach out to an accountant as they get started in business and have them walk you through the specific forms and taxes you will have to be familiar with. That way, rather than figuring out what deductions to apply retroactively, you can do some tax planning as you go. An accountant local to your state or town can help you optimize the tax setup for your particular business and may have recommendations as to whether you set up your business as an LLC, S-Corporation, etc., depending on your state’s regulations. They may even have recommendations about the best retirement account to optimize your tax savings.
Optimize as much as you can
It can be frustrating to spend countless un-billable hours just trying to figure out how much of your hard-earned revenue you have to pay in taxes. Optimizing your tax setup will help to minimize the time you spend on this admittedly gloomy task. Here are some practical ways to streamline this process:
– Pay federal quarterly estimated taxes online at IRS.gov (your state and local tax offices may have this option too)
– Have separate business and personal bank accounts
– Save templates of your tax reports from previous years
– Scan everything (paper copies might get lost)
– Hire an accountant to be sure you’re claiming all the right tax-deductible expenses
– Keep your receipts! (scan those too)
– Stay up to date on sending and receiving W9s throughout the year