Budgeting for tax season can be the difference of an incredibly stressful tax season vs using your refund to take some time off and travel. Unfortunately, most of us tend to experience the stressful version of tax season. Budgeting is one of the most effective ways to relieve that stress. Have a game plan for the year and really stick to it.
Here are 4 practical steps to take:
1. Know how much you are making
The nature of being a freelancer means that income can come from many different clients or businesses. According to our data 38% of our users state that the earn income from 2 or more sources (Everlance Data).
You never want to live above your means and having a budgeting plans help you stay on track. Try and think in terms of having a job that you are paid through a payroll and the tax is automatically removed. Break up every payment by week and month and have a clear idea of what your forecasted income will be for the year.
2. Track your Deductions
Did you know that every 1,000 miles driven for work is worth $540? If you choose not to use an app to automate your deductions create a spreadsheet of your monthly deductions. This way you will have a better idea of that years tax returns.
3. Set aside money for taxes
How much money should I save for taxes as a freelancer? This can be an intimidating question, not to mention it takes a lot of discipline to put money aside throughout the year for tax time. Many freelancers fail to do so and blame ignorance, but unfortunately that’s not a valid excuse for the IRS. Reduce the risk of being audited and set aside the correct percentage. Try this handy tax calculator to see how much you should be saving this year.
4. Budget for Savings / Rainy day fund
At the beginning of the year set a goal for yourself on how much savings you are going to have in the bank after tax season is over. Having a goal to save towards will create an incentive for you, so pick something big like a downpayment on a new home or car.
You’ll be amazed by how having something tangible to work towards makes a difference. No one knows what life has in store next and as a freelancer your income tends to be a bit riskier than most people so it’s always a good idea to be prepared with a rainy day fund. Why not set a goal and see if you can save 20% of your income this year?
This is a post from a member of the Freelancers Union community. If you’re interested in sharing your expertise, your story, or some advice you think will help a fellow freelancer out, feel free to send your blog post to us here.