How to Budget for Taxes as a Freelancer and Avoid an Expensive Tax Bill

The prospect of earning money on your own terms can be exciting, but many freelancers underestimate their tax liabilities.

Laurice Wardini, a freelance writer and the co-founder of ClothedUp, says, “I knew taxes would be expensive when I first started freelancing, but I was shocked when it came time to pay them.” She adds, “I didn’t prepare properly and was stuck with a huge bill at the end of the year.”

To prevent unwelcome surprises, freelancers need to keep tabs on their tax liabilities all year long. If you’re not sure where to start, here’s a look at how taxes work for freelancers and how much you need to set aside.

How Taxes Work for Freelancers

Once you become self-employed, the first thing you need to know is that your taxes are twofold. You’ll likely have to pay the self-employment tax along with income taxes.

Self-employment tax

If you make at least $400 in net earnings as a self-employed individual, the Internal Revenue Service requires you to file Schedule SE and pay a 15.3% self-employment tax. Of the 15.3% tax rate, 12.4% goes to Social Security and 2.9% goes to Medicare. That said, you won’t have to pay the Social Security part of the tax on earnings that exceed the program’s annual income limit ($147,000 for 2022).

Individuals can deduct the employer’s half of the self-employment tax when calculating their adjusted gross income. Doing so will help to reduce the amount of income tax owed. However, it won’t reduce net self-employment earnings or self-employment tax.

Income taxes

Next, income taxes are levied on the net adjusted gross income of both businesses and individuals. As a freelancer, you may be responsible for taxes at the federal, state and regional levels. Here’s a bit about each:

Federal income tax rates are progressive and currently range from 10% to 37% for 2022. You’ll likely pay multiple rates that increase as your income increases.

Fourty-one states levy income taxes with varying rates. The nine that don’t are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.

Regional income taxes are less common but they do exist in a handful of states. They are most often levied by cities, but may also be levied by counties, school districts or special districts.

Your income tax liabilities will depend on where you live, your tax-filing status and how much money you earn. For this reason, you’ll need to do some research to figure out what you owe. Typically, you can find income tax laws and rates published on the websites of state and regional governments.

[READ: Understanding Federal vs. State vs. Local Taxes.]

When Do Freelancers Pay Taxes?

The next question is, when are taxes due for freelancers? If you expect to owe at least $1,000 when you file your return at the end of the year, the IRS requires you to make quarterly estimated payments. For the 2022 tax year, the payment due dates are as follows:

Quarter one: Due April 18, 2022.

Quarter two: Due June 15, 2022.

Quarter three: Due Sept. 15, 2022.

Quarter four: Due January 17, 2023.

To avoid tax penalties, it’s important to make your estimated payments on time and in your best estimation of the amounts owed.

[Read: Should You Be Making Quarterly Tax Payments?]

How Much Do Freelancers Need to Set Aside for Taxes?

If you’re a freelancer who makes at least $400 in net income, you’ll need to set aside 15.3% of your net earnings for the self-employment tax and enough to cover your income taxes.

To figure out how much to set aside for income taxes, check the income tax rates that apply to you on the federal, state, and regional levels. Tally them up with the self-employment tax to get the total percentage you’ll set aside.

For example, Andrew Marshall, a self-employed certified financial planner, says, “I set aside 30% because I live in California and my self-employment tax, plus state and federal income taxes, account for just under a third of my income.”

Tax Planning Tips for Freelancers

Once you know how much to set aside, how do you go about saving it? Marshall advises, “Every time a client pays me, I transfer 30% of their payment to my tax savings account. Then, I pay my estimated taxes every quarter using that money.”

While you could also set aside your estimated taxes weekly, monthly or quarterly, doing so after each payment is a smart move that can prevent accidental overspending.

If that all sounds too complicated, it may be best to hand off your taxes to a professional. Amanda M. Ferris, managing director of consulting and education company Clover & Kind, warns, “Don’t DIY unless your expertise is in small business accounting.” She explains, “Working with a qualified professional from the start will help you avoid the stress, sleepless nights and penalties that come with leaving taxes as an afterthought.”

More from U.S. News

15 Self-Employment Tax Deductions

Small Business Owners Share Their Secrets to Success

How to Start a Small Business

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