DEATH AND TAXES GUARANTEED: THE REST IS UP TO YOU

If you ever find yourself missing your 9 to 5, chances are, it’s during tax season. 

Traditional employment takes a lot of the angst and mystery out of your relationship with the IRS. You declare your tax status when you fill out your onboarding paperwork and your paycheck gets neatly direct-deposited with the government’s slice already removed. Out of sight, out of mind.

For freelancers, it’s never so simple. Every year, while the folks around us are gleefully scheming on how to spend their tax refund, we’re usually bracing for impact. Did we pay enough throughout the year? Are we doing this right? Did we miss anything deductible? Will we be audited? Are we going to jail? 

As much as it seems like there should be a prescribed “right way” of managing self-employment income tax, it’s forevermore maddeningly situational. If you ask 5 different freelancers how they handle tax season, you’ll get 5 different answers, but a few (at least almost) universal pieces of good advice stand out. 

Choose your own tax adventure, but here’s what we can all agree on: 

Get a High-Yield Savings Account

Per Uncle Sam, anyone who expects to owe more than $1,000 at tax time must pay estimated quarterly taxes or run the risk of incurring an underpayment fine that you would need a degree in advanced mathematics to calculate. Most freelancers choose to submit these quarterly payments, while others swear it’s worth it to let your money earn interest all year, accept the underpayment penalty, and pay taxes all at once. 

Whether or not you plan to pay estimated tax, it’s incredibly beneficial to keep your nest egg somewhere it can grow all by itself. A high-yield savings account, like those available through SoFi, Wealthfront, and Marcus can get you earning up to a steady 4-4.5% APY without the volatility of brokerage accounts. Sock some money away for taxes, unexpected business expenses, or dry spells to ensure you’re always a little financially liquid (no one wants to be too financially viscous). 

 Keep Track of Your 1099s

The deadline to send out 1099s is January 31st, leading many a naive freelancer to assume that everything should be available to them by mid-February, at the latest. There’s nothing worse than filing your taxes and then opening the mailbox on March 27th to discover one more 1099.

Save yourself the pain of filing an amended return by keeping your own running list of clients who owe you tax documents. If you don’t have what you need by the deadline, pick up the phone or send an email to track it down. In this case, no news is not good news — if the client reports the payment at any point, the IRS will expect you to have declared that income. 

Remember, the Taxman Cometh

Perhaps because we have so much latitude in how we approach taxes, self-employed folks are 2-3x more likely to be audited than our traditionally employed peers. 

Understand that you’re under some amount of additional scrutiny, and make sure you can support your deductions with documentation. If the old shoebox full of receipts works for you, we say Go with God. However, if you’d like to come into tax time with fewer little pieces of paper, there are lots of great software options designed to help small business owners track expenses. 

The more organized you are throughout the year, the less the whole thing will suck when it’s time to file. Stay ready so you don’t have to get ready. 

Hit Them With Your Best Shot

Close only counts in horseshoes and hand grenades, but taxes are a formidable runner up. It’s as though when they named “estimated quarterly taxes,” they were actually admitting that it’s impossible for freelancers to precisely predict their annual income.

At a baseline, self-employment taxes ring in at a horrifying 30%, but this figure is offset by all of the deductible expenses you will incur throughout the year. To further complicate things, there is no glory in overpayment for freelancers. Even if you got a tax return, you would wish that money had been earning interest in a high-yield account all year. 

While your financial situation won’t always allow it, the safest bet is to take it one paycheck at a time and stash 30% (or as much as you realistically can) in an interest-earning account. This way, your money can grow while you get a better idea of that quarter’s earnings and deductions. The longer you’re able to keep your tax fund in a high-yield account, the more passive income you’ll generate. 

Find an Adultier Adult

At-home tax prep software is more user-friendly than ever, but there’s no shame in needing (or even just wanting) help. 

If you’ve taken on international clients, done work in multiple states, made some complicated investments, or just can’t deal with your own shoebox of receipts, a professional accountant might be the best investment you’ve ever made. 

Find someone who is up to date on the intricacies of self-employment tax law, and you’ll recover hours of your valuable time. Whether they discover write-offs you never would have thought of or save you from an audit by pointing out that dog grooming isn’t deductible, there’s a good chance they will pay for themselves in the long run. 

Taxes are inescapable, but there’s no rule against strategies that make them less stressful. Find an approach that works for you, and invest in the tools and help you need to make the job go faster. It’s a small price to pay for freelance freedom.