Author: Matt McCue / Source: 99U by Behance
Does the thought of doing your taxes make you want to cry? For many in the design industry, including myself, the answer is a resounding yes. But a solid grasp of figures and finances is the equivalent to building the strong foundation to a building. If you can shore up the money part of your business, you can spend more time doing what you really love—the creative part of the job.
For those workers issued a W2 form, managing taxes is a relatively smooth process. Your employer does much of the heavy lifting and your income stream is typically more straightforward. However, taxes can be a beast for freelancers. I experienced this when I freelanced for six years before joining 99U. There are all sorts of nooks and crannies, rules and methods that apply to self-employed workers that I had no idea about, but needed to quickly learn to ensure I abided by the IRS rules and paid my fair share of taxes.
What follows is a dive into some of the muddier parts of the freelancer taxation waters. With the help of certified financial planner Susan Lee and accountant Amy Northard—both specialists in preparing taxes for creative souls—we debunk some widespread myths freelancers might stumble across while doing their taxes.
Myth: Everyone pays taxes annually every April.
Wait a second, you say, what’s wrong with paying your taxes annually? Let’s break it down into two buckets. If you’re a full-time employee, your taxes, along with your contributions to Medicare and Social Security, are taken our of your paychecks throughout the year. But if you’re freelance, you need to take the tax equivalents out of your paychecks.
Northard recommends setting aside 25%-30% of your net profit on every job to account for your taxes on the payment.Then, rather than waiting to pay your taxes annually every April, set up quarterly tax estimate payments where you project your total earnings for the quarter and pay the corresponding taxes every three months. “This is beneficial so that when you do get to tax time, you are not draining your account,” says Northard. This two-part approach allows you to have money at the ready when it’s time to pay taxes and helps to better manage cash flow evenly over 52 weeks.
Myth: You bring home the same amount of money as a W2 employee that makes your same wage.
For many of us, our Social Security and Medicare contributions are a blip on our taxes—the contribution percentages seem nominal and it feels like eons until we can collect on them. But, if you’re a freelancer, you’re at…
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