For the hard-working man, taxes are a means of contributing back to a society that has helped them get to where they are today. But when you’re paying taxes as a freelancer, it can get complicated. Right off the bat, the world of taxes can sometimes be mind-bogglingly confusing for a lot of individuals who are not well-versed with tax laws in their country or even the mechanics of it. Still, most people will need to comprehend since this will affect their lives in the long-run.
Of course, there’s going to be times that getting a constant pay cheque every month won’t just cut it when it comes to our expenditure and lifestyle. There’s going to be times when we’ll do some side hustles just to meet ends. But even though we’re going to do some side hustles or even become a sole independent contractor, we’ll need to consider a lot of factors. One of the most critical questions that we have to ask ourselves is, “how will we be paying our taxes?”
Taxes and Being a Sole Contractor
Filing taxes might seem like a simple tax for those that have full-time jobs and are associated with a company, but it’s never easy when you’re making a bit of money on the side. Most just don’t want to bother with taxes since they lack the proper knowledge of the system or got back advice from their friends and colleagues. The truth about paying taxes as a freelancer or as an employer might be like learning a skill or a hobby; there might be a learning curve that you’ll have to go through, but you’ll eventually get it.
Sometimes, understanding about taxes is almost the same as driving a car or learning your first steps when you’re walking: you’re bound to make mistakes, but you’ll eventually learn about what you’ll have to do. Still, these mistakes can have consequences. Preventing these mistakes from happening is better than having to pay hundreds to thousands of dollars for your mistakes.
Compared to workers that can confide in the benefits and constant compensation of a company, freelancers and those who have their benefits will need to take the initiative to pay their taxes and the benefits of these employees. So what are some tips and tricks when handling some taxes? Here’s what you can do:
Start Forecasting Payments
Compared to full-time work, where you’ll get a steady amount of funds, freelancing is high risk and high reward business model since it will entirely depend on how many clients you’ll have at a given time. Although, one key advantage of being a sole contractor is that you can have more than one client, depending on how well you’re able to handle your resources and your time.
If this is the case, your cash flow won’t be as “consistent,” and you might need to continually make changes depending on your contracts and cash flow. It’s important to base your forecasts on real numbers and not what you’re “expecting.” Fortunately, there are tools that you can use in calculating taxes, which can make it even easier to manage your finances.
In certain countries like the United States, it’s important to start paying for your quarterly estimated tax.
Even if you’re a sole contractor, startup, or freelancer, it’s important that you get some help from a professional. Having supervision from tax experts and business advisers, such as those from Bryden Johnson, can ensure that any margin for error can be mitigated. After all, when you’re handling taxes, you will need to make sure that everything is in order.
Saving for City Tax
It’s important to note that if you’re living in large cities, you might have to pay state tax, and in highly urbanised areas, it can be quite high. Not only will you have to deal with high state tax, but you’ll have to keep in mind city tax bills. If this is the case, you might want to consider making drastic changes to your monthly expenditure. Some freelancers would suggest increasing their savings up to 40% for each monthly payout so you’ll have enough for additional taxes that you’ll need to cover.
If you do have any money left that you’ve compartmentalised for taxes (that also doesn’t include your emergency fund), you might want to place them into your retirement fund.
Although being a sole contractor and freelancer might seem like a high-risk and high-reward business model, you can essentially earn more from having multiple clients at once. It might seem like you’re restricted by your tax options, but there are actually a variety of ways of paying your taxes. Still, a part of paying for your taxes is about knowing how to juggle your finances.