New to Freelancing - Help!

[KeeKat]

Good morning Mustachians!

I've been freelancing off and on since January of this year. I wasn't doing much (maybe making $150-$300 a month), so I wasn't expecting to make enough to have to pay quarterly taxes. At my full time salaried job, I have made roughly 32K so far this year.

I am now moving from my full time salaried position to working part time at my employer 10 hours a week (around $250 a week or so) and freelancing closer to 15-30 hours a week. I know this will bump me over the threshold to pre-pay quarterly taxes.

I have pretty much no idea how much I should expect to make from the freelancing. Depending on new clients and their needs, I could be doing anywhere from 40 hours a month freelancing to 120 hours a month ($1,200 to $3,600 though I really doubt it will get behind 60 hours a month for the immediate future, but again, there are a few big prospects that we might add to the lineup soon).

How do I get started? Should I be concerned about penalties for not pre-paying the first two quarters of this year? Is there anything I can do to avoid penalties for NOT pre-paying?

Other question... Neither position has a retirement savings option available to me. I always max my Roth IRA in the beginning of the year. Is there any way I can trick the system to saving more of my money tax free and lowering my tax burden? I do not have an HSA available to me either and no kids yet for a 529 plan.

TIA!!!

[starguru]

The worst thing that happens if you don’t pre pay is you pay at the end of the year with interest.  It’s not the end of the world, and at the amounts you are talking about the penalty won’t be very high.  I would still try to make quarterly payments though.   I personally would hire an accountant; that’s what I did when I worked for myself and I don’t regret it.

You can set up a SEP 401k and contribute retirement savings to that.  Last I checked you could contribute 20% up to 53k a year.

I am concerned about one thing:  you wrote you made 32k so far this year, so you should make about 50k if you stayed full time all year.  The 30/hr you stand to make freelancing doesn’t seem like enough to make it worth your while.  Do you have to find your own clients?  Are you losing health insurance from the old job?  Vacation time?  What line of work is this?




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[MDM]

Is there anything I can do to avoid penalties for NOT pre-paying?

Yes.  Increase withholding from the salary job to satisfy your overall tax liability.

Depending on your withholding to date, and how much your overall income will drop for the rest of the year, you might have withheld enough already.  Or not.  You can estimate your 2018 taxes with the "what if?" worksheets of TurboTax, TaxAct, etc., or the case study spreadsheet, if you haven't already done so.

[KeeKat]

The worst thing that happens if you don’t pre pay is you pay at the end of the year with interest.  It’s not the end of the world, and at the amounts you are talking about the penalty won’t be very high.  I would still try to make quarterly payments though.   I personally would hire an accountant; that’s what I did when I worked for myself and I don’t regret it.

You can set up a SEP 401k and contribute retirement savings to that.  Last I checked you could contribute 20% up to 53k a year.

I am concerned about one thing:  you wrote you made 32k so far this year, so you should make about 50k if you stayed full time all year.  The 30/hr you stand to make freelancing doesn’t seem like enough to make it worth your while.  Do you have to find your own clients?  Are you losing health insurance from the old job?  Vacation time?  What line of work is this?

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Great questions! You are very much right I won't be making as much with the freelancing. I'm escaping a toxic workplace where my mental well being has really taken a hit and I've been physically sick from stress. The freelancing will be through a public relations firm that gets the clients and then gives me the work. It's run by an old boss of mine who is hopeful to be able to make it a full time position once the need is there. Even if that doesn't happen, I'm using this freelancing as a bridge to get out of toxic workplace, through the wedding stress and then I can start job hunting if needed. I have a lot saved up that I can tap into if I need (hopefully I'll at least be able to stay even with my expenses and freelancing and then focus on saving again when I can) and my fiance's job is a very stable government position.

As for insurance, I am covered with my employer's insurance through the end of August. I'm getting married in early Sept. and will be
moving onto my fiance/husband's insurance.

I'm definitely going to look into the SEP IRA - do I need to be a business to do that? I am told that I will receive a 1099 for tax purposes. Do you have any recommended resources to learn more about this process?

Thank you SO MUCH!

[wenchsenior]

As noted about, either increase your withholding at your regular job...

or do what I do, which is keep a spreadsheet with quarterly running total freelance income, and send in a quarterly check to the IRS.  I don't even send a form,  just a check with my SS and the note  "2018 taxes Quarter #1" or whatever.  Usually I have to estimate how much I will be earning for the last couple weeks of each quarter b/c the check goes in before the quarter ends.

You can run detailed calcs of how much you will owe.  Rule of thumb used to be 20-30% of gross (b/c you have to cover both sides of the payroll tax, not just one).  However, I have found that 15% of gross has been more than enough for me, given how low our tax rate has been the past few years.  And taxes have gone down again, starting this year, so you might want to run numbers for yourself.

[trollwithamustache]

Freelancing is misleading. its a business. As such, its easier for many to account for it as such. Open a separate bank account, and either use a spreadsheet or something like quicken.  Use a separate credit card for business expenses than the one you use for personal.   Its easier this way to keep track of net revenue from Gross revenue. Then as you bring cash over to pay yourself, calc the taxes on it and leave those dollars set aside for paying quarterly estimated taxes. You may find you don't pay your self very much but your business covers a lot of  your costs. whaat? Its a brave new world and you'll love it once you settle in.

Also, its ok to use an accountant sooner than later. A good one would be open to a coaching deal, where they help guide you in how to set everything up and what deductions to keep track of, then you do all the leg work so it flows easy into their tax prep system.