If you are self-employed, you should be saving money to pay your taxes. Freelancers and independent contractors are required to make estimated tax payments generally every quarter, so you’ll want to have a good idea of how much to save for taxes. It is essential to plan to save for your quarterly tax so you can stay on track, its always better to have a refund than to owe money.
Below are four tips on how to save money to make sure you always have enough money for your taxes.
Transfer money into Your Savings Account Monthly
You need to budget your taxes like any of your other bills and expenses. Calculate what you will need to save monthly to have enough for your quarterly tax payment. When you submit your taxes each year, you can find information to calculate your tax payments for the next year.
Make sure you are disciplined about putting your tax payments into your savings account. If you aren’t practicing discipline when it comes to putting money in your savings and leaving it, try having a separate account that you won’t touch, and it is only designated for your taxes.
Transfer Percentages of Each Payment to Your Savings Account
If you are income is erratic, make it a practice to transfer a percentage of each payment into your savings account. Assigning a portion of each payment is more manageable than a monthly payment when your income is sporadic. Social security and Medicare are self-employment tax and will be approximately 15 percent of your income, so put away that plus whatever your federal and state income tax rate is into your savings account. It is always better to put away more money than you need.
Direct Your Tax Refund to Next Year’s Taxes
Applying your tax refund to next years taxes helps in reducing your estimated quarterly taxes, which makes it easier to make the monthly payments. This strategy is recommended if you are having trouble saving or keeping money in your savings account. IT would be the safest way to go to make sure that you can pay your taxes.
Withhold More Tax from Other Employment Income
Withholding more tax from other employment income can be a trouble-free way to pay taxes. You can adjust your exemptions or state the extra amount you want to withhold on your W-4. When you are trying to figure out how much to withhold, remember to calculate our self-employment earnings.
What Percentage to Save for Taxes
Experts recommend putting aside 25% to 30 % of your income because you are not just paying income tax. You also must pay self-employment tax as well. You want to make sure that you are putting away enough money to cover both taxes. Twenty-five percent to 30% can sound high, but when you are self-employed, you need to foot the entire tax bill, and roughly half of the percentage is attributed to self-employment taxes.
Estimate Your Earnings
You can estimate how much income you will earn for the entire year, then calculate 25% to 30% of that number and divide by four to get the amount you would submit to the IRS every quarter.
If you calculate that you will make $100,000 in net income after subtracting business expenses and you estimate that you need to set aside 30% or $30,000, you will need to pay $7,500 in taxes per quarter. Make sure to give yourself room to wiggle and a cushion in your finances and always save for taxes!
At tax time, you will complete Schedule C, which is a form that allows you to subtract your business expenses from your overall income. It’s essential as a self-employed contractor to keep track of all your business expenses, including office supplies, mileage for any driving done for the business, travel expenses, and maintaining a home office. If dealing with taxes, budgets, and costs is overwhelming, consider hiring an administrative assistant trained in these items to help you during tax time. Find your Excellent Admin here.