Death and Taxes. Well, Taxes, Anyway.

In my last post, I talked about the fact that Tamara and I have restructured how we handle the money that Berry-Brewer earns. I mentioned that we used to put a certain percentage into a tax account and sort of left it at that. I want to pick up on that train of thought today, because if you have or are planning to start a freelance business, you really need to be aware of your tax situation.

The Company Tax Account

It used to work out that approximately 20% of every dollar we earned would go into our combined tax account. We highly, strongly, and strenuously recommend that you get yourself a tax account if you don’t already have one. The suggestion was made to us by the banker that opened our original business account, and since there was no fee to open additional accounts, we created a special one just for taxes.

According to the banker, tons and tons of small businesses get themselves in huge trouble (even going out of business) every year because they don’t plan ahead. It’s easy to think, “Oh, I’ll just come up with the money at tax time,” but that’s a lot easier said than done. We took the advice and set up an account for our 20% with the knowledge that we absolutely would not touch it until tax time.

It was awesome. Tax time came, and voila, there was money to send to good old Uncle Sam.

My Personal Tax Account

Now that we’ve started keeping our money separate, it’s up to us to individually take care of our tax money. It’s kind of a bummer to get a $500 check and then realize that 20% of that has to be taken right off the top. BUT I DO IT. I actually went to the bank right after we restructured our payment system and opened my own special tax account. It’s really frustrating sometimes because if money’s tight is so easy to think, “Oh, I could just borrow some from that account.” I refuse to give in to the temptation, though. When tax time rolls around and I can just write a big, fat check, I’m going to be so pleased with myself.

Paying Taxes on Freelance Income

One last thing that I wanted to add in here is that freelancers aren’t generally expected to just pay taxes once a year like “regular people.” We are expected to send money in quarterly to the Department of the Treasury. My family did our personal taxes with TurboTax or the H&R Block software or some such thing this year, and it allowed us to go ahead and print up what they call “payment vouchers.” The program estimated how much I would owe every three months by basing it on what I earned last year. I can tell you that this number is pretty darn low, considering we’ve already made that amount several times over in 2008.

So, my plan is to send in extra money with those payment vouchers, and when we have to file our big tax return in April of next year, I should be pretty close on what I owe. I’m not a tax professional and can’t really give out advice, but this is the method that makes the most sense to me. If you don’t know how to pay quarterly taxes, you should definitely look into it, as you might actually get penalized pretty heavily for not sending in regular payments to The Man.