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When I filed my 2017 taxes last month, I was reminded what a scramble that process can be for freelancers like me. It’s not uncommon for self-employed workers to have to write big checks in April to cover federal and state income taxes. Then they have to write another one to fund their retirement plans.
The chief reason for the sticker shock: Freelance pay can fluctuate from year to year, so it can be difficult to estimate your annual total income in advance. One year you might work a seasonal job, for instance, and the next year tackle a series of part-time or contract assignments. Those fluctuations make setting aside the correct amount for your yearly tax bills tricky. Meanwhile, how much income you collect also directly affects the sum you can set aside in many retirement accounts.
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According to a recent T. Rowe Price study, 26 percent of boomers and 32 percent of Generation X respondents work independently in some capacity. Older independent workers can sometimes face stumbling blocks with these critical financial transfers without an employer automatically deducting taxes from each paycheck while funneling a percentage from the gross income to an employer-provided retirement plan.
Based on your previous year’s federal tax return, you (or your accountant) must figure out the total amount you will owe Uncle Sam on April 15, and how much you should pay in quarterly estimated taxes throughout the year. If your state has an income tax, you are also typically required to make estimated tax payments.
For federal returns, you can find the address for filing your payments and due dates as part of Form 1040-ES. You may face a penalty if you didn’t pay enough estimated tax for the year, or if you didn’t make the payments on time or in the required amount. You can avoid the penalty as long as you pay at least 90 percent of the tax for the current year, or 100 percent of the tax you owed for the previous year, whichever is smaller.
What I’ve found is that, even with the precarious nature of a freelancer’s finances, when you’re disciplined and automate the withdrawals from your paychecks on a regular basis, you can avoid the springtime surprise of a steep tax bill and save for retirement one paycheck at a time. Think cruise control.
If you pay your taxes via electronic filing, for instance, you can schedule all four estimated future quarterly payments at once and save yourself the headache of potentially forgetting to mail a check.
There are several promising money management apps designed to help you plan for taxes and retirement savings that you might want to investigate. Here's a look at three of them.
Track.Tax lets you link your bank account to the app, which scans for deposits that are self-employed income. The app is designed for anyone who receives income that will be reported on 1099 tax forms. Once you’ve signed up, it notifies you when new income is deposited into your personal bank account and asks if you’d like to withhold for federal income tax, state income tax and self-employment tax.
Track provides withholding suggestions on each of your 1099 income transactions. You can choose to withhold for some (or none) of these payments. You can set the app to automatically withhold for taxes, or you can manually trigger a withholding one deposit at a time. If you approve the withholding, it moves the amount it suggests to an FDIC-insured account that’s held in your name at the app’s banking partner, Evolve Bank. The app also has a feature that tracks your business expenses for potential tax deductions.
Track will send your estimated quarterly payments to the IRS and state government tax agencies for you, once you’ve approved the amount. The earmarked tax withholdings you authorize are held in your Evolve bank account for payment to the applicable tax body and cannot be returned.