If you’re an independent contractor, then you have one thing to remember: You have to save money for your taxes.
It’s easy to spend all the money you have coming in, but you should be saving enough money to pay your taxes quarterly or yearly, depending on how much you earn.
Knowing how much to save can be tricky
It can be hard to know exactly how much to save for taxes, especially if you’re in a position where your earnings vary by the day, week or month. One good thing to do is to predict the tax bracket that you’re going to fall into. If you’re able to project how much you’re going to earn, then you’ll be able to estimate how much you should save.
Do you have to pay quarterly or annually?
If you are going to be earning enough to pay over $1,000 in taxes yearly, then you should prepare to switch to a quarterly schedule. If you’re going to owe under $1,000 in taxes, then it’s perfectly fine to assume that you can pay annually.
Don’t forget about deductions
Deductions can be a life saver for independent contractors, because it reduces how much they have to pay in taxes overall. You can decide to save for taxes without deducting your expenses, or, if you would like, you can deduct those expenses through the year and save a portion of your taxes based on your profits, not your losses.
What are some good ways to set aside your tax savings?
If you plan to set aside your taxes, then a good plan is to have a separate bank account for them. That way, the money will be totally separate from your business accounts or personal banking accounts.
If you calculate everything correctly, then you should be in a good position come April. However, if you do find that you haven’t saved enough, don’t be too concerned. You can look into payment plans, called installment plans, with the Internal Revenue Service or look for other ways to reduce your tax bill. That way, you can stay on top of what you owe and know how to plan better in the future.