Now that you are self-employed, financial matters get a little more complicated. As an employee you get a paycheck and taxes are withheld from your paycheck throughout the year. When you start freelancing or running a new business you have to plan and prepare for taxes. Don’t get overwhelmed or fear taxes, just follow some simple planning steps below:
Use a separate bank account for your business, deposit all income into that account, and pay all expenses from that account.
You can get a separate credit card for your business purchases and pay off those purchases with the business checking account.
Project your annual net taxable income (we have a free worksheet to help you).
Calculate the taxes due on that income (use our worksheet for this).
Pay quarterly estimated taxes to the IRS and the state or set aside the funds in a savings account to pay at tax time.
I’ve worked with hundreds of entrepreneurs starting out on the path to being their own boss. If I don't get the chance to advise these entrepreneurs at the beginning of their journey, sometimes I have to give them bad news at tax time because they didn’t plan ahead and understand how taxes work. Don’t get caught in the tax squeeze (which means you pay last year’s taxes and need to start paying this year’s taxes at the same time).
We put together a simple Google Sheet to help you make calculations for your annual taxable income and projected estimated taxes. This worksheet provides some definitions and calculations to help you compute the Estimated Quarterly Tax due on your business income.
The good news is that if you use our FREE worksheet to compute the taxes on your business income, you will know how much is left to pay yourself. Make the estimated payments from your business account or put the money in your business “tax” savings account. Compute the amount of working capital you need to leave in the business account. Leave about 6-8 weeks of estimated business expenses in your checking account and you can pay yourself the remaining funds. Just make a transfer from the business account to your personal account.
The IRS and your state expect to get your tax money throughout the year just like when you were an employee and paid taxes with each paycheck. But you have to proactively make those payments. I highly recommend setting up an account using this link IRS Account and Tax Payments. You will be able to make payments and track your history so that you have proof of payment at tax time. Most states also have an online portal.
Get our FREE Estimated Tax Worksheet HERE
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