As a freelancer, the burden of estimating your tax could be a nightmare, and dealing with annual financial panic is also not the best. Although there many people who partially or solely live on the freelance income, only a few find it easy sorting out their tax billing as it is often a daunting task for the majority.
This guide will help you understand how to handle all your tax issues and employ a credible system in estimating your freelabce tax. Also, after going through this freelance tax estimator guide, you would not be overpaying or underpaying your taxes, imagine how you will feel knowing you are right about your taxes!
Some of your tax responsibilities are handled by your employer if you work in the regular 9 to 5 PM schedule, but if you freelance, you have to calculate your taxes, and that may be challenging. More so, you might end up owing the government a considerable sum if your estimations are wrong.
Do note that as a freelancer, your taxes include 2.9% for Medical care, while 12.4% of your income is Social Security tax. The Federal Insurance Contributions Act (FICA) (Social Security tax) is meant for the disabled, children, and the homeless. Social Security tax is a shared responsibility between you and your employer; you have to shoulder the total amount if you work for yourself as a freelancer.
Here's a quick way to estimate your freelance tax:
It is time to flashback to the third-grade math as you would need to remember some multiplication tables, but now, the numbers are more significant and weird as well. Let’s estimate your tax using an assumed amount; we are pretty sure of arriving at a reasonably expected amount while you enjoy what is left. Say you are still single, and on average, you are sure of $3500 net income at the end of the month, that will amount to $42,000 annually.
In that case, your taxable income would be 22% of your annual income, but you may estimate and pay quarterly. The US tax system is dynamic and progressive; it makes provision for incomes less than $10,000 annually. You are expected to pay 10% of your income peradventure it is not up to $10,000 in addition to 12%, which is the social security tax.
Ideally, you are supposed to pay your freelance income tax monthly, and using the freelance tax estimator, you would have a monthly estimate. Tax estimates are expected from you as consultant freelancers or consultants since your monthly income may not be stable.
Moreover, the IRS would not start hunting you unless you deliberately skip paying your tax, or you owe a considerable amount annually. It is advisable you pay monthly or at most quarterly to avoid a big chunk of tax at the end of the year.
Learning about necessary deductions would help guard against the overestimation of tax. There’s no problem should you overestimate or underestimate your tax as corrections can always be made on your subsequent payment.
Having understood how the tax payment system works and what you’re expected to pay, you might still find it difficult saving up tax dues. The best method to achieve secure payment of your taxes when needed is separating the tax amount from the rest money and keeping it aside.
It would do you some good to open up an account with your bank just for this purpose or work with an online bank. Using the freelance tax estimator would have helped arrive at the amount you have to pay, and you can always forward that to the account created for that purpose. Once they are due for payment, you can forward all your expected tax contributions using the IRS Form 1040ES.