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Create tax automations

Now that we’ve established the foundations of our business finances, we need to properly manage them. As a freelancer, you’re responsible for withholding and paying taxes because the IRS considers you to be self-employed, whether you have an LLC (or other business entity) or not. If you don’t pay your taxes, it can result in penalties and fees. 

In this step, we’ll go through how to figure out how much to set aside and how to automate moving that money out of your business bank account so you don’t have to remember every time you get paid.

Since we laid out our different types of accounts in the first step, we know that money automatically flows from your invoicing tool into your business bank account. Once the money lands in your business account, we have two options with taxes:

  1. Withhold them now.

  2. Withhold them after paying yourself.

Personally, I like to withhold taxes right away so that’s how we’re going to display this example.

Let’s say you expect to make $50,000 throughout the year as a freelancer. If you set up the automations properly, every time you send an invoice to a client and that money lands in your business bank account, your bank (in my case, Novo) recognizes it and automatically puts the funds in a tax savings subaccount.

Estimating what you need to set aside

When setting this up, Novo will ask what percentage you’d like to set aside. I recommend 25-30% of your income and it’s worth noting that this percentage will never be “perfect”. The IRS even calls them estimated quarterly taxes. Personally, I’m doing 25% this year as I expect to make roughly $60,000.

✅To get an idea of what your tax liability may be for the year, I suggest using a calculator like this. The calculator doesn’t replace the need for official calculations and tax filing. It only serves projection purposes and can be used to help determine your estimated quarterly tax bill.

On top of paying quarterly, you need to file in April

Quarterly tax payments in 2023 are due:

✅April 18th (for income earned January - March)

✅June 15th (for income earned April - May)

✅September 15th (for income earned June - August)

✅January 16th (of the following year - for income earned September - December)

I wish that making estimated quarterly payments were the only tax tasks we’re responsible for, but you also need to file your taxes each April. With quarterly payments, you’re essentially prepaying taxes throughout the year. Then in April, you’re filing documents to get accurate records of your income. Since quarterly payments are “estimated”, you may owe more taxes at this time or you may get a refund. Filing can be done on your own, but I recommend working with a tax professional (CPA or EA).

Set up an EFTPS account to make quarterly tax payments

The easiest way to make estimated quarterly tax payments is to create an online account so that you can link your bank and make payments digitally.

 However, here are the steps for setting up an account and making payments:

  1. Go to www.eftps.gov

  2. Enroll online - according to the IRS, you’ll need:

    1. Taxpayer Identification Number.

    2. Banking account number and routing number.

    3. Address and name as they appear on your IRS tax documents.

  3. Select "Enrollment."

  4. Select your proper account type

  5. Enter the requested information

  6. Click submit

Once your account is made, you can make a payment:

  1. Go to www.eftps.gov

  2. Select "Make a Payment"

  3. Select "Log In" and use your EIN, PIN, and the password you just set

  4. Enter the payment information in the step-by-step screens (below)

This should not be considered tax advice. The below screenshots are for educational purposes only can be found here.

There’s not a universal way to automate this right now, but you can set reminders on your calendar and if you’ve been setting aside funds, just log in, submit payment from either your personal or business account (wherever you’ve set aside the automated payments), and you’re done. Alternatively, if you have a good understanding of your tax liabilities, you can schedule payments to be made at a later date within the EFTPS portal. You can always see the federal quarterly due dates here.

If you’re in a time crunch and don’t have time to set up an account, you can make a “direct payment” here from a bank account or card. I prefer the EFTPS option because continuously using direct pay when you know you’ll be making quarterly payments every year is like checking out as a guest on Amazon. You’ll be back - set up the account.

Business tip: As part of your financial tech stack, you’ll need an accounting software. It serves a few roles, but the main reason you need to do your accounting is for tax purposes and reporting. When you go to file your taxes the following year after making self-employed income, you’re going to need to know your business income and all deductible business expenses so that you can accurately report your income (and avoid overpaying taxes). At the end of the playbook, there is a short list of recommended professionals that work with freelancers.

Everyone’s tax situation is unique, so talk to a professional

If 25-30% isn’t precise enough for you, read on. If 25-30% works, feel free to skip this section.

To get an understanding of your potential tax liability, do some research on your state’s income taxation. For example, Texas and Florida don’t have state income tax while California and New York have over 20%.

I recommend fact-checking everything you read and before doing anything, speak with a professional (CPA or enrolled agent) who’s familiar with small businesses in your area. Even your favorite financial creator may not know the unique tax requirements for certain states or cities. For example, I live in Kansas City — which is split between Kansas and Missouri — and there’s an additional 1.5% tax on the Missouri side and if you live in Kansas but work in Missouri, it gets even more complex with refunds.

You’re also responsible for self-employment taxes, which are currently 15.3% in 2023 in the United States. When you’re an employee, the company you work for pays half of the tax for you. When you’re a freelancer, you’re responsible for the whole 15.3%.

There are a lot of nuances and rules that may only apply to your unique situation. It’ll never be perfect unless you work with an accountant and know exactly how much you’re going to earn throughout the year, so don’t stress about it. As long as you’re withholding a meaningful amount from all the money you receive, you’ll be in a better position than if you didn’t.

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