Freelancing Resources
Freelance Work Exchange
Guru.com
eLance
Craigslist
|
|
|
One of the more tedious parts about running your own business is paying estimated taxes. You have to pay enough that you don’t get hit with huge penalties at tax time, but who wants to overpay?
If you’re new to freelancing, you might be dreading this prospect. I know I did the first time. Estimated taxes aren’t fun to calculate.
The first thing you need to do is be certain that you need to pay estimated taxes. According to the IRS website, you must pay estimated taxes if you meet the following criteria:
1. You expect to owe at least $1,000 in tax for 2006, after subtracting your withholding and credits.
2. You expect your withholding and credits to be less than the smaller of:
1. 90% of the tax to be shown on your 2006 tax return, or
2.100% of the tax shown on your 2005 tax return. Your 2005 tax return must cover all 12 months.
Once you’ve decided that you need to pay estimated tax, you need to know when to pay. While they say you have to pay quarterly, the IRS has an interesting definition of quarterly that does not correspond to the standard business quarters. You need to pay quarterly taxes April 15, June 15, September 15 and January 15. No, they are not evenly spaced. Just mark the dates on your calendar.
Now you need to look at your income. Is it steady throughout the year or does it fluctuate? Do you expect a lot of growth in your income? A change in income impacts how you pay your quarterly taxes.
Yes, it is all but impossible to know what your quarterly taxes will turn out to be. You probably can’t even tell what your annual income will be, as most freelancer’s incomes fluctuate tremendously. You need to figure out the best way to keep from overpaying, as that is nothing more than giving the IRS a nice, interest-free loan of your hard earned money.
If you’re good about your bookkeeping (and you should try to be!), then every quarter you can simply calculate your profit and your tax liability. Spend a little time each and every month on your books, and this will be relatively easy to do.
There are two ways to do this. If your income is more or less stable, you can use the regular installment payment plan, in which you estimate your annual income, figure the tax, then divide by 4 to come up with your quarterly payments. This is relatively simple.
On the other hand, if your income varies a good deal you may want to consider the annualized income installment payment plan. This one requires quite a bit more work, but it keeps you from overpaying during your low earning times. Annualized payments are quite tedious but a good way of keeping your estimates accurate. You can get the 2006 form at http://www.irs.gov/publications/p505/15008e25.html.
If this doesn’t work for you, there’s always the “Safe Harbor” method. The tax code allows you to take the previous year’s tax liability and pay 1/4 of that each quarter as your estimated tax. This is obviously very easy to calculate.
The advantage is that if your income increases you still won’t have to pay a penalty if you have to pay more taxes at the end of the year... unless your income is over a certain level (check the IRS website to be certain of the level), in which case you may have to pay 110% of the previous year’s taxes.
No one likes paying taxes, and having to do it more often is one of the prices you pay for being a freelancer. Make sure you either keep up with them or hire a bookkeeper to do so for you so that you don’t get stuck with interest and penalties.