Happy Tax Day, fellow US freelancers!
Despite being a day that most people do not look forward to, Tax Day is one that none of us can ignore. Paying taxes can be stressful, time consuming, and generally not that fun (who enjoys parting with their hard-earned money?). What’s more, freelancers have special considerations that they must take into account at tax time that salaried employees do not. Below are six tax-related topics for translators and other self-employed professionals. Please keep in mind that no tax advice that you read in this blog post could or should replace that of a CPA or other tax professional. All specific tax questions should be referred to a professional who is familiar with your situation.
Taking care of your own withholdings
It is essential that you determine what percentage of your revenue should be set aside for your estimated tax payments. Saying that you should set aside $XX per quarter can be unrealistic, since many translators’ revenue varies significantly from quarter to quarter. Use your previous year’s income (or your best guess) to estimate how much you will make in any given year to determine what percentage you should withhold to avoid any underpayment penalties. It is also important to keep this money separate from the outset to avoid being tempted to spend it and to make tax payments easier. I personally have two business accounts: one into which all revenue is deposited and one that is specifically for taxes.
Quarterly tax payments
If you’re self-employed in the US, your estimated tax payments are due quarterly on dates set by the Internal Revenue Service. What is the most convenient way to pay? I personally find that paying online via the EFTPS website is the best. Payments can be conveniently scheduled immediately or in advance, the site is secure, and you don’t have to worry about stamps, postmark dates, or the like. Plus, it’s free!
Filing any 1099-MISC forms?
IRS forms are like alphabet soup. That said, if you collaborated with another translator or editor in the past year or outsourced any portion of a project and paid a provider more than $600, you need to remember to file 1099-MISC forms with the IRS in addition to your own return.
As small business owners, we are responsible for our own retirement planning. Our employers will not automatically deduct retirement account contributions for us. We are our employers, so we are responsible for making sure that after our long and successful careers, we have a nest egg big enough to retire comfortably. Small business owners in the US do pay Social Security and Medicare taxes through their Self-Employment Tax, but Social Security probably won’t be enough to retire with ease. Figure out how much you should be putting away each month. You can also work with a tax or retirement pro to reduce your tax burden through tax-deductible retirement account contributions.
Deducting business expenses
Do you find keeping track of your business expenses tedious? To make the task easier for myself, I have a specific credit card that is used solely for business expenses. In this day and age, I rarely use cash to pay for anything, much less my business expenses. At the end of the year, the card summary from my credit card company is a perfectly sorted business expense report. Plus, the card can be linked to my accounting software so it tracks expenses automatically. I also use my phone to take pictures of my receipts (so I don’t have to worry about losing them) and save them to a specific receipt sub-folder in my tax folder so that they are easy to locate at tax time.
Doing it yourself vs. hiring someone else?
Many small business owners rely on the services of an accountant. For a few hours per month, an accountant can track all of your income and expenses, inventory (if you have it; service businesses like translation usually do not), etc. Others prefer to go it alone. I do a hybrid: I use QuickBooks (which I can’t recommend enough) to track my business finances throughout the year and then give everything to my CPA at tax time. I personally find that the reduced amount of stress come tax season is worth it to me, as is the peace of mind knowing that a professional is taking care of my taxes. Perhaps it’s the same kind of peace of mind my customers have when they entrust me with a translation?
Tax season can be stressful, but ignoring the unique situation you may be in as a freelancer when it comes to paying your taxes would be a mistake. Contact a CPA, find a free tax clinic in your area, and ask your fellow freelancers for advice to make sure you’re not forgetting anything.
If you liked this post, please consider subscribing to this blog and following me on Twitter at @Bentranslates.