Looking back to the very first year that I made enough income from freelancing for gaming publications to have to pay estimated taxes, I was freaked out. Like very freaked out. On one hand it meant I was doing well – making some decent money and pushing closer to my goal of eventually quitting my day job as a news reporter and pursuing game-focused writing full-time. On the other hand, it meant being forced to wade neck-deep into the murky, putrid swamp of tax hell.
Estimated taxes in particular are the bane of every freelance noob, and the first year you’re stuck doing them is usually the most confusing and terrifying. How the hell do you hit a moving target that fluctuates widely depending on how much income you make from one year to the next? Very carefully. It gets easier after you clear that first hurdle. Since every person’s situation is different, I’ll leave the real in-depth nitty-gritty on estimated taxes to the tax professionals. But one piece of advice that I’ve come to live by as a freelancer when it comes to estimated taxes and keeping your ass covered is to follow the 30 percent rule. More on that in a minute.
Being self-employed, freelancers have to pay more taxes than the average Joe on payroll. Depending on your individual situation, the number of deductions and expenses you have, and whichever way the wind blows in a given year, you could be shelling out 20 to 25 percent of your total income on estimated taxes each year. Unfortunately, freelancers don’t have the luxury of just throwing that big lump sum at The Man in a single check come tax-time. You have to pax taxes on money you’ve earned AS you earn it or be penalized, and since publications don’t take out any taxes for you, you have to handle all of this on your own. Hence the need to pay quarterly estimated tax.
If you don’t set aside the money needed to pay these taxes when they’re due, you can wind up screwing yourself bigtime. I’ve seen some freelancers take a laid back approach to taxes and saving a portion of their earnings for estimated tax payments, and that’s dangerous indeed. Better to play it safe and end up on the good side of the fence than get hit with penalties and cause major headaches for yourself down the road.
This is where the 30 percent rule comes in. I set aside approximately 30 percent of EVERY SINGLE CHECK that comes in. This money is dead to me for most of the year. I deposit it into a separate bank account created solely for tax money, and I don’t touch it until I have to pay my estimated taxes. When spring tax time roll around and I have my taxes done, I use whatever money is left in there to square up if I under-paid and to cover the expense of having my taxes done.
The awesome thing about training myself to do this is the amount of taxes I owe when all is said and done is usually lower than 30 percent, so when everything is paid off and squared up for the year, all of that extra green becomes a hot sexy cash-infusion. An insta-refund. A new computer. A credit card bill wiped clean. A savings boost. Or all of the above. It’s nice to have a few thousand bucks of wiggle room at the end of the tax year.
It takes discipline, and it seems like a pain in the ass, but it’s a system that works amazingly well if you stick by it. I always have enough to cover my tax liability, and usually there’s quite a bit leftover to channel to other things as needed.
One more thing. Hire someone to do your taxes. Whether it’s a local accountant or a bigger company, spend the green to have it done for you and ask questions along the way. It takes a huge amount of stress out of the equation, letting you focus on what really counts: cranking out the words and firing off bitchin’ pitches.
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This is excellent advice, and I thank you for it. Although I have a full time position, I’ve started doing free lance work for a Canadian Review site and your tips really help. I imagine our tax laws differ slightly, but all the same, your insight is much appreciated!
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