If you’re a relatively new freelancer, there may be a few things you’re still learning. If you are still looking for freelance or side gigs income opportunities, check out Thinkflow Income Helper. One of the key differences in a freelancer’s income is how you are taxed. While the tax brackets don’t change, the method of tax collection does change. When you are a W-2 employee, your boss (or whoever does payroll) actually takes the taxes out of your paycheck for you.
When you’re a freelancer of any sort, you’re what’s known as an “independent contractor.” This means that you’re responsible for separating the taxes from your income on your own. While this can seem daunting, once you create a system for yourself, it can easily become a habit. That way, you don’t spend more than you technically have.
How to Calculate and Set Aside Your Taxes
If you’re ready to create your holiday budget, calculating your taxes will help you identify what portion of your income is earmarked for the IRS. While this might seem like an extra hassle, you’ll be grateful come tax season that you set the money aside.
As of 2021, the self-employment tax rate is 15.3%. The first 12.4% of that rate is for Social Security taxes, and the remaining 2.9% is for Medicare. This is separate from income tax.
Income taxes are calculated based on your earnings for the year, and there are different tax brackets. For example, the first $9,500 you make is taxed at 10%. You can view all the tax brackets here.
To begin your budgeting, you’ll want to set aside your 15.3% of self-employment tax. Then, you’ll want to calculate what you owe based on the tax brackets. If the idea is daunting, begin by setting aside 15.3% of your income, as well as an additional 10-15% for income taxes.
Tips for Holiday Budgeting
1. Have a separate bank account
Having separate bank accounts for business and personal spending can help you distinguish what money is for you, and what money is for your business. For example, you may want to have a personal checking and savings account at one bank, and a business checking and savings at another. The former will allow you to have personal spending money and savings. The latter will be a place to pay and track business expenses and set aside your tax payments in a savings account.
2. Plan your work ahead of time
Want more money in the bank? Plan out your future projects in advance. If you know what you have to set aside for tax purposes, it’s easier to visualize what you have leftover to spend. One of the great things about freelancing is that if you want more money, you can take on more projects! If your holiday budget isn’t where you want it to be, start planning new income streams now. Building up some cash and projects now will put more money in your pocket, and if you time things right, more time to spend with your family come the holidays.
3. Propose gift-giving guidelines
During the holiday season, you might just be planning to give gifts. Both have a financial commitment. If you’re eager to shower those you love with gifts, yet want to stay in budget, there are plenty of ways to work the gift exchange in your favor.
In case your family and/or friends are on board, consider a group gift exchange with guidelines. If you all want to gift each other, propose a budget limit. If you have a large family where getting everyone a gift feels impossible, consider drawing names. So, if everyone draws two names in the family to give gifts to, within a specific budget, you can make a bigger impact with your gifts.
4. Make meals a shared endeavor
No matter who you spend your holidays with, chances are there’s going to be a big meal. If you’re used to supplying that feast, and still want to stay in budget, there are alternatives. One way to share the fun is to encourage everyone joining the meal to prepare their favorite dish, and do things potluck style. Alternately, if you’re the cook, you can encourage your guests to purchase the ingredients for their favorite dish and bring you the recipe. Then, you can even make it together.
5. Share your talents
What kind of freelancer are you? Maybe, the gifts you give to loved ones can be related to your talent and skill. For example, if you’re a musician, maybe you want to write an original piece for a loved one’s milestone. If you are an artist, maybe your gifts are handmade. Regardless of how you freelance, chances are there’s a good way to incorporate your talents into meaningful gifts for your family.
If you are interested in this topic, click here to find out Tips to Budget and Save Money on Any Income.