Budgeting for tax season can be the difference between an incredibly stressful tax return vs. using your tax refund to take some time off and travel.
Unfortunately, most of us tend to experience the stressful version of tax season. Proper budgeting is one of the most effective ways to relieve that unnecessary stress.
The goal is to have a solid game plan for the year and really stick to it.
Here are 4 practical steps to take and budget for taxes:
1. Know How Much You Are Making
The nature of being a freelancer means that income can come from many different clients or businesses. According to our data, 38% of our users state that the earned income from 2 or more sources (Everlance data).
You never want to live above your means and having a budgeting plan can help you stay on track. Try and think of keeping a budget in terms of having a job where you are paid through a payroll system and the tax is automatically deducted.
Now, break up every payment by week and month and you’ll have a clear idea of what your forecasted income will be for the year.
So many freelancers and small-business owners get caught in the trap of a positive P&L and think, “money in, money out, I’m still up!” While that may be true, without a budget in place, or at minimum a clear financial breakdown of how much money is coming in and out plus the amount you intend to set aside for taxes or savings, and you could be looking at a real mess come tax season!
2. Track Your Deductions
We live in the age of technology and we should be taking advantage of it. Long gone are the days where you’d have to sit down at night by candlelight with your ink & quill jotting down numbers in a ledger.
Even 20 years ago people were still using paper to keep track of deductions, and it’s only been 10 – 15 years since computers were mainstream enough to start using spreadsheet software (like Excel)…but you still had paper receipts.
Now, you don’t have to do any of that. There are so many expense tracking options that you almost have to move into the 21st century if you want to succeed in business!
Mileage & Expense trackers like Everlance, Expensify, Concur, etc. can make tracking your mileage & other expenses a breeze. Making it incredibly simple to automatically track and tally up your final expenses at the end of each day, week, month or year. Consolidating everything into a nice little report that you can then import into your favorite tax software (such as TaxAct), Quickbooks, send to a tax preparer or even file with an employer or client for reimbursement.
Did you know that every 1,000 miles driven for work are worth $545 (see: IRS Standard Mileage Rate)?
Using an app like Everlance will completely automate the entire process of company mileage tracking. We won’t go into the entire feature-set here, we have plenty of content that will explain how our mileage tracker works, instead, we’ll leave you with this.
If you’re not using technology to automatically track your expenses, you’re probably missing something and you’re definitely losing money. Every hour you spend on tax prep is another hour you’re not making money, and according to the latest stats, over 200 hours are spent every year preparing taxes!
3. Set Aside Money and budget for taxes
How much money should I save for taxes as a freelancer? This can be an intimidating question, not to mention it takes a lot of discipline to put money aside throughout the year for tax time.
Many freelancers fail to do so and blame ignorance, but unfortunately, that’s not a valid excuse for the IRS. To be on the safe side you can reduce the risk of being audited and by setting aside the correct percentage. Try this handy tax calculator to see how much you should be saving this year and don’t forget to pay your quarterly estimated taxes.
4. Budget For Savings / Rainy Day Fund
At the beginning of the year set a goal for yourself on how much savings you are going to have in the bank after tax season is over. Setting a goal to save towards will create an incentive for you, so pick something big like a downpayment on a new home or car. You’ll be amazed by how having something tangible to work towards makes a difference. No one knows what life has in store next and as a freelancer, your income tends to be a bit riskier than most people so it’s always a good idea to be prepared with a rainy day fund. Why not set a goal and see if you can save 20% of your income this year?
We would love to hear if you have any budgeting tips, email us at Support@Everlance.com.
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