Taxes suck, we all know that, but you have to save for them or Uncle Sam is going to come after you. In this episode, Mike Volkin shows you the easiest way that freelancers can save their money for tax time.
How Freelancers Can Save for Tax Time
Hey everyone, Mike Volkin here with another Freelancer school podcast. Today we’re going to be talking about freelance taxes. That’s right. This is a writing question that we got from one of our freelance freelancing masterclass students and she said, we should go ahead and do a podcast about this. And I agree because I really haven’t addressed this in the podcast yet, but all freelancers pay taxes. I ran into a freelancer a couple years ago that did not save for taxes and found himself with a big bill from Uncle Sam, at the end of the year. So how does a freelancer and consultant save for tax time? Well, this is what I do. It’s not necessarily the only
way to do it, but it’s the way that I do it. And I’ve seen many other freelancers do it the same way. So what you want to do is mark in your calendar for every Friday, it doesn’t have to be Friday, just once a week, I do it on Friday, you could do it on Tuesday or on Thursday, whatever, just pick a day of the week and put it in your calendar to adjust revenue for taxes. That should be the calendar entry, adjust revenue for taxes. So what you do is you go into your bank account and you look at all of the deposits since the last time you did this task. Okay, so if it’s every Friday, what I’m going to be doing is looking to the previous Friday, and noting any deposits. Now I know that my tax rate I’m somewhere between 25 and 35%. Okay, so what I’m going to do is I’m going to be conservative, and want to take 35% of all revenue 35% of all revenue, and I and I transfer it to another account that I have just a savings account.
And then what you can do at that point is just hold the money until
Uncle Sam asks you for it until you file for taxes that way, at least you have some money built up in, in a savings account. Now granted bank savings account don’t
save very much, you might be looking at point 1% or something. But the very least it’s not in your main checking account where you’re likely to spend it or pay yourself with it right? Because that’s not your money. You have to it’s wholesome for Uncle Sam because unlike working for an employer where you get a salary check, and the taxes are automatically taken out. That is not the case for freelancers and consultants. You get the raw full gross amount of the check. It’s called the gross revenue, okay, you get that gross revenue in, you got to save some. Now granted, if you save 35% right off the top, you’re going to have write offs. As you know, if you have a CPA doing your taxes, everything you spend money on your business, is what’s called a write off. So at the end of the year, you’re going to reduce what’s called your base income. I know this confusing, but you’re going to reduce your base income. So let’s say that your revenue for the sake of round numbers as a whole
hundred thousand dollars. Now you saved 35% of that for taxes, that means you have 35,000 say for taxes somewhere. Now what you’re going to do or your CPA will do is they’re going to write off all your expenses. So let’s say you spent $20,000 on office supplies and other consultants helping you with some work. Maybe you bought a new computer and a monitor, right? All that stuff added up to $20,000. Well, your income is now not $100,000, you’re going to be reporting to the IRS, your income is now $80,000. You got the 80,000 from your raw income, your raw revenue of 100,000 minus your expenses is 80,000. And you’re paying your taxes on the 80,000. So in this scenario, you’re only paying tax on 80,000 not the hundred thousand now, yes, it’s not usually that clean and cut and dry. But that’s the way I like to think of it. And that’s the way you can always be conservative enough to make sure you have enough for taxes. Okay, so that makes sense. So, really the takeaway for all this is
your calendar every week, you put aside some time, maybe 10 minutes to just calculate all the revenue. All I do is I open up a separate Excel spreadsheet I say, Okay $1,000 deposit here, $850 deposit there, $5,000 deposit there. Great. Now I total that all up, and I just multiply times point three, five, multiplied times point three, five, or whatever your tax rate is, okay? And that number is what you want to transfer to your savings account which is going to be withholding for which is going to be withheld for tax purposes. I hope this clears everything up. Good luck.