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Freelance Taxes 101: How to handle taxes now that you’re a solopreneur

There’s a lot that goes into handling taxes, especially as a solopreneur.

And as much as we want to say it’s as easy as filling out a form, it’s not. So whether you’re transitioning from a 9-to-5 or deep-diving into freelancing as your first career, this can be a challenge and that’s totally normal. When talking about taxes, it’s not just another financial obligation. Responsible freelancers also need to branch out to retirement and how handling your taxes appropriately will affect your retirement.

We chatted with Angie Moody of Ruby Money to know more about handling taxes as a new solopreneur, common mistakes made, prepping for retirement, and the ​​overwhelm that comes with it.

Two of the most common mistakes to avoid

“I see a lot of solopreneurs experiencing guilt or shame over not having their finances figured out, so I really want to emphasize that this is very common, even for incredibly smart and talented people,” says Moody. She adds that two of the most common mistakes people make when it comes to taxes include not keeping a separate bank account and not setting money aside for taxes.

“Many people over-complicate the beginning of their freelance careers and think they need to do a lot of paperwork to file for an LLC or an S-Corp. The reality is, most solopreneurs just need a separate business bank account where all their income can land. From there, you can allocate money for yourself (i.e. your paycheck), for your taxes, for business expenses, and for retirement,” she shares, adding “come tax time, it will be way easier to figure out what you’ve earned and what your expenses are. This can also help you in the event you are audited as your records will be super clean!”

With a lot of things going on, like organizing your monthly budget and salary, doing the work, and building your personal brand, setting money aside for taxes can be forgotten. Moody iterated that “with every payment that comes in, freelancers should be putting aside money in a separate account for self-employment taxes and income tax.”

She details that “this amount is different for each person but ranges from 20-45%. When you work as a W-2 employee, your employer will handle most or all of your withholding for you. Once you break out on your own, you’re responsible for setting aside enough money to pay your taxes throughout the year at a rate that’s acceptable to the IRS to avoid penalties.”

Solid steps to handle your taxes minus the overwhelm

Once you’ve checked those two things, next step would be to learn how to navigate through the overwhelm that often comes with taxes. Moody validates that, “of course, it’s scary when you’ve been avoiding looking at your bank statement or thinking about taxes.” “Take a deep breath and don’t panic, because it’s going to be okay! It’s primarily avoidance that leads to overwhelm,” she adds.

For her, two things can greatly help with the overwhelm: educating yourself and finding a partner or system that works for you. Educating yourself takes time, and this is where you need to be kind and patient to yourself. There’s no way you’ll learn everything about filing taxes as a solopreneur in one night. Begin by “learning how taxes work and see how much you will owe so there are no surprises come tax time next year.”

Another solid piece of advice from the Ruby Money CEO is to create a plan and find a partner or system that can “help you stay on top of taxes,” she says, adding “as solopreneurs we must embrace outside help and find ways to outsource and automate the things that aren’t core to our business (or that we don’t love.)”

Impact of lack of knowledge

Conversations about tax don’t stop at knowing what to do or how to handle it. It’s also necessary to educate yourself about the impact of not knowing enough, and how it can affect not only your business but also your retirement. Moody says, “a lot of people don’t realize that you can actually deduct your contributions to a self-employed retirement account  (which is a special retirement account designed for sole proprietors and LLC’s) on your taxes to lower your taxable income and reduce the amount of taxes you have to pay.”

To make it easier to grasp, she shared a sample below:

Say your business earns a $70,000 profit and your estimated tax rate is 35%. If you contribute $10,000 to a retirement account you can reduce your tax liability by $3,500. That’s $3,500 back in your pocket today in addition to the $10,000 that is now in your retirement account.

Ruby Money has a Retirement Calculator to help you out with this. Moody adds that “we tend to be more familiar with the idea of a “write-off,” where you’re getting a deduction for business expenses like laptops,” which is technically true! “But the difference is, that money is gone. You spent it. You’re actually keeping more money in your own pocket by giving it to your future self via retirement savings,” she adds.

So, why the overwhelm?

If there are lots of resources about tax and tools like retirement calculators, why is it that so many freelancers, creatives, and solopreneurs find themselves still overwhelmed, or even anxious? Moody explains, “I think a lot of the stress really comes from trying to exist within this system that just wasn’t built for the solo business owner. When you’re a W2 employee, you negotiate your salary upfront and things like taxes and retirement are taken care of for you. But for solopreneurs, you are bombarded with financial decisions that can have a massive impact on your profit.”

The thing about freelancing is that you have to be on top of everything all the time. You need to be the one thinking about projects and workload, and emails. On top of that, things like taxes are also on you. Being overwhelmed doesn’t mean you’re not doing freelancing right. It simply means there’s a lot for you to learn and that’s not such a bad thing.

On a good note

Moody acknowledges that “being a solopreneur is challenging, but in my opinion, the rewards are 100% worth it.” She adds, “I see your struggle and we along with everyone at Wethos are here to support you and create a better way.” It’s a matter of finding your people so you won’t have to figure things out on your own. And finding the right system, set of tools, and resources to help you deal with personal finance and taxes so you can put more time and effort into building your business.

Tammy Danan
Tammy Danan

Tammy Danan is a storyteller who reports on environmental and social issues. She also covers productivity, creative pursuits, and the future of work. Her words have appeared in VICE, Audubon.org, ZEKE Magazine, Shutterstock, Toggl, among others. You may find her on Instagram @SlowFreelancing.