Tax season isn’t fun for anyone. For some people, it can be a time to celebrate having a little extra money in your bank account. However, when you’re self-employed, dealing with taxes can be a headache.
Unless you pay your taxes monthly or quarterly, you may get hit with a big surprise when tax season comes around.
There’s another option, though. You could always save money throughout the year to pay taxes. This can be hard for many entrepreneurs because there’s no promise that every month will give you the same profit. But you can do it with a little discipline.
Here are some tips on how to budget for taxes as someone who is self-employed.
Add Up the Basics
First, you need to add up your basic needs. This includes things like food, shelter, clothes, and anything else that keeps you alive. Add these up and it will tell you how much you need every month in order to maintain your life.
This doesn’t include extras, like drinks out every weekend or movie tickets. There is a place in your budget for those things, it’s just not here.
People that get a regular paycheck can dedicate specific amounts of money to every item in their budget. That doesn’t work for the self-employed, because your income varies from week to week.
Instead of dedicating a hard number, use percentages. Consider putting 40% aside for expenses, essential and non-essential. Save 30% for taxes, 15% for your retirement, and 10% for donating.
Do what you want with what’s left.
Those numbers are just rough amounts. Every person’s tax situation is different, so it’s a good idea to talk with a tax expert about how much you need to save personally so you have the right amount set aside.
Keep your money in separate accounts to make it easier to keep track of your funds. Label a few online bank accounts for your taxes, bills, and everyday spending. Divvy the money up into each account as you get paid.
Every fiscal quarter, self-employed workers are supposed to make estimated quarterly tax payments, but self-employed people tend to spend that money and wait for tax time to come around. That usually ends poorly. You’ll wind up having to scramble for money to pay your taxes at the end of the year.
Consider quarterly taxes a saving grace. You can’t spend the money if it’s already where it needs to go. Pay taxes in small increments to keep from having to pay a lot later on.
If you have a business that picks up and drops off, save your money while your pickings are good. This makes sure you won’t be in a panic when things start to slow down.
Give Yourself a Paycheck
Get serious about putting each pay you get into different budget categories and cut back on nonessential things so you can start to save more. You want to get to where you can pay yourself a regular paycheck so you’re not trying to live paycheck to paycheck in a system where you’re not sure where your next meal will come from.
Budget For Taxes!
At the end of the day, no matter what kind of work you do, you have to budget for taxes. No matter how much or how little you earn in your home business, the IRS expects their share. Don’t back yourself into a corner come tax time!
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