For freelancers, planning for taxes is part of everyday life. Unlike full-time employees, freelancers don’t automatically contribute to their taxes all year long – they have to do it “manually.” When you’re paid as self-employed, through a 1099 form, your client/employer (or their payroll company) doesn’t set aside or send any money to the IRS on your behalf the way companies do for full-time employees. But of course, you still owe taxes. That’s why Lili’s tax tools for freelancers are here to help.
There are two types of taxes you need to pay: the so-called self-employed tax (which is a flat 15.3% of your income) and your income tax (which fluctuates depending on how much you make). For a more exhaustive look at how this all works and how to estimate how much you owe, take a look at our previous blog on how to estimate your taxes.
Your self-employed tax (the 15.3%) and an estimate of your income tax are due every quarter, meaning you need to proactively send a payment to the IRS every three months.
Now, since your income tax fluctuates, it’s not always easy to know the total of how much to save and send. The general rule of thumb is that saving around 30% of your total income should keep you from any bad surprises come tax season, but again, it all depends on how much you make and which tax bracket you will land in. And worse case, if you overpay, you’ll get a refund. Better safe than sorry, right?
But the real struggle is that it’s not always easy to remember that when you’re paid $1,000, you should really only spend $700. Humans are just not wired that way! If there’s $1,000 in your account, chances are… you’ll spend $1,000. And that’s why we created Tax Bucket!
Lili’s Tax Bucket is a sub-account, where freelancers can set aside money for taxes and protect it from their debit card! Just like a mason jar in your kitchen cabinet, you can always access that money if you ever need to, but it’s not in your wallet.
There are two ways to add funds to your Lili’s Tax Bucket: you can either make one big deposit at the end of each month or set up the auto-save feature. If you choose the latter, we’ll automatically move a percentage of every deposit directly into your Tax Bucket. Do it once and you’ll be responsible all year!
When the time comes for your quarterly payment, you can simply move the money back from your Tax Jar to your primary account, and send it to the IRS.
For more information, always check the IRS website.