Before you get into individual strategies, it’s important to take stock of your financial situation. Earning income without the protective shield of a company can be invigorating, but it’s also a completely new world. For example,
You will need to pay more taxes.
SE, or self-employment taxes, are added on top of your general income taxes. Whatever tax bracket you’re in (or anticipate being in for the next year), add another 15% on top.
You will need to pay taxes more frequently.
If freelance and contract work make up most to all of your income, you’re going to be making enough that you need to start making quarterly payments. Take the amount you made over the past three months and submit your percentage (SE+income) of that income to the IRS. You can make over and under adjustments for April 15th, but paying too little throughout the year can make the IRS sit up and pay attention.
You will need to provide your own health coverage.
Depending on where you live, the penalty for not being covered can be non-existent (as far as tax implications go). But if you need or want the security of a health insurance plan, work through the marketplace and make sure you grab a plan during open enrollment. The good news is that, provided you can’t opt in to a plan through a spouse or your parents’ coverage, then you can usually deduct the premiums as a quasi-business expense.
You will need to track your income.
Before you start cutting sections out of your budget, you need to know approximately what your monthly income is. That means you need to start building records now. Think of your life like it’s a small business: you don’t just need profit, you need cash flow. Tracking your income is also important for direct tax purposes. You need that aggregate amount so you can estimate your quarterly taxes with reasonable accuracy. You also need to know your annual income by the time April rolls around: not everyone who hires you is obligated to give you a 1099-MISC, but you’re required to report every cent.
Browse our resources for more ways to organize your taxes and start planning for retirement. If you want customized strategies and advice, contact us at Roberts Tax and Retirement Planning in Gilbert.