This is just a followup to my short post from the other day. I’d originally meant to include some info on my first tax season as a freelancer in a while, and then totally forgot.
So, back in my early 20s I was primarily a 1099 employee for a while. I did pay quarterly taxes for about a year, IIRC, although when I transitioned into a union version of freelancing, my taxes were mostly withheld–they were still kind of a nightmare because I’d have ten or so employers over the course of the year with a corresponding number of W2s, but at least I didn’t have to manage calculating and paying quarterlies. Anyway, I kind of knew the drill. So when I started freelancing seriously again last year, I also started setting aside 25% of what I made. For most of the year it was in an account connected to Mint, and therefore part of my net worth, but I realized that was gonna suck when I actually had to use it to pay taxes, so I moved it off Mint entirely–it’s now in an account at a completely separate bank and the only thing I use that account for is tax payments.
My 2018 taxes were mostly finished a couple of months ago. Since I’d had a fair amount withheld from my regular paychecks in 2018, even though I made almost $14K in freelance income and hadn’t paid quarterly taxes on it, I still only ended up owing the federal government about $1500 and Indiana a bit under $300. And I got a decent refund from California, since I’d had taxes withheld there as if I was going to be employed there all year, which in the end I wasn’t. So I was able to move nearly $2000 from my tax account back into my normal accounts, as if I’d gotten a refund–very handy! I used about half of it on travel and about half went into my cash savings, which I’m still trying to build up to $50K this year; I’ve been stuck around $43K for a while now, moving money in and out of savings in good/bad months, but I’m hoping to permanently get up to $45K at the end of April when some checks come in. Cross your fingers for me.
Meanwhile, I also calculated and paid first-quarter taxes last week. I’m not really sure how my income is going to shake out this year, but during the first three months I received just under $10K (Jan and Feb were really good, March was not good since I traveled for half of it and didn’t work much, and the work I did do, I am mostly going to get paid for in April or even May.) So I decided to estimate $40K for the year, figuring that if things change appreciably I can always recalculate for the next three quarters. I also decided not to account for any deductions or anything like that; I would rather overpay all year and get a refund next year, really. I like refunds, it’s a psychology thing, don’t @ me.
(Also, if I really do make $40K, I’ll need that extra money to offset the extra health insurance money I’ll owe. I only estimated $30K when I signed up for an Obamacare plan and so right now I’m paying insurance every month like that’s true. But I could end up having to pay up to an extra $1200 next year if I make too much money, so it’s just as well to intentionally overpay quarterly taxes, in case.)
The upshot of all this calculation is that for the first quarter, I paid the feds about $2K and Indiana about $450. This was almost exactly the amount I had in my special taxes account from moving over 30% of my earnings (I upped it to 30% for the new year) so, go me! It is a massive improvement to simply have the cash set aside from each paycheck and be able to transfer it every quarter, vs having to make this big deduction from my checking account or whatever. (And of course it’s a massive improvement over the alternative of not paying quarterly taxes and getting hideously behind, too.) It feels tidy. And it’s easier to deal with now than it was in my 20s because you can make the payments via an online bank transfer instead of having to fill out a coupon and send in a check, etc etc.
So, that’s my tax system! 30% of everything to the special tax account, pay quarterly, hopefully get a refund next year based on business deductions, rinse, repeat.