‘Cause I’m the TAXMAN!

April 15th, 2008 | Posted in Freelancing

Let me tell you how it will be;
There’s one for you, nineteen for me.
‘Cause I’m the taxman,
Yeah, I’m the taxman.

Should five per cent appear too small,
Be thankful I don’t take it all.
‘Cause I’m the taxman,
Yeah, I’m the taxman.

If you drive a car, car – I’ll tax the street.
If you try to sit, sit – I’ll tax your seat.
If you get too cold, cold – I’ll tax the heat.
If you take a walk, walk – I’ll tax your feet.

Taxman!

-The Beatles

April 15th… Nobody in the United States over the age of 18 needs to be reminded of the significance of this date. Bleeech.

Freelancing is both a bane and boon when it comes to taxes. It’s good that you are much more in control of your taxation in that you are allowed to make legitimate deductions for your business and therefore adjust your overall income level. While you have to (not SHOULD, but HAVE TO) make quarterly payments to the IRS you don’t have to turn over a percentage of every check you get to them automatically. It doesn’t make a giant difference but why should the U.S. Government get to invest YOUR tax money and get interest from it when you don’t have to file your taxes until April 15th of the next year? It’s also worth pointing out that if you overpay your taxes, which many American’s gleefully do to get that big TAX REFUND CHECK, the government doesn’t include the interest that money would have earned if you’d put it in a savings account instead of giving it to them over the year. I know people who purposefully claim zero exemptions as an employee just to get a “bigger refund”. Huh??? I never could figure out why anyone would be happy about getting ‘money back’, since it was your money to begin with and the government borrowed it from you and paid you back without interest… anyway as a self employed person you can adjust your quarterly payments so you do not overpay and either just cover your taxes or owe a couple of bucks when you file. If you are smart you can take a little money from each job, put it in a money market account and let it accrue interest until you have to withdraw it to make those quarterly payments… it may not amount to much every little bit helps!

The bad thing is that you get an upfront, personal view of how much you actually pay in taxes as opposed to having that invisible hand snatch it from your paycheck before you even see it, and renders it into a number on your 1040 form. Making that quarterly payment drives the impact of the tax levels in this country home and makes you shake your head and think “how can their be a state budget crisis when I am forking out this much in taxes?” or worse yet… you start thinking about the Federal money pit. You also have to pony up the entire amount of tax dough for your social security and Medicare contributions, whereas as an employee your employer has to pay half of it. The U.S. Government calls it “self employment tax” rather than “FICA”, but it’s the same thing.

There are lots of smart things you can do as a freelancer, to help out your tax situation and to better organize and get tax benefits like incorporating or starting tax sheltered SEP funds and 401Ks. I’ve written a few blog posts about these subjects and I thought today would be a good day to post links back to them, as well as to some other resources for self employed folks concerning taxes. Enjoy, and don’t let the taxman get you down!

Self Employment, Taxes and the Benefits of Incorporation

Organizing your Fledgling Freelance Business

Some Freelance Tax FAQ

List of links with tons of freelance tax advice articles

Comments

  1. cedricstudio says:

    Well said, Tom. When you add in the other taxes we pay (i.e. sales tax, gasoline tax, etc.), it’s ridiculous how much of our money the government takes. Something like one third of the US economy is taxes. And yet we still have a state budget “crisis” and an enormous national debt. I just shake my head. When I hear politicians talk about raising taxes, I don’t know whether to laugh or cry.

  2. mugs says:

    I totally agree with you on this Tom! Many people yearn for that refund, as if it is a bonus! I prefer to pay quarterly, and then a bit more on tax day!

  3. Lash LeRoux says:

    Thanks for the blog, Tom. As always, I couldn?¢‚Ǩ‚Ñ¢t agree more. Although it?¢‚Ǩ‚Ñ¢s still quite an inconvenience, my situation now that I?¢‚Ǩ‚Ñ¢m freelancing is much preferred to my past occupation. I know we all have our personal horror stories, but try this one on for size: between 1997 Р2002, I wrestled for Ted Turner?¢‚Ǩ‚Ñ¢s WCW and Vince McMahon?¢‚Ǩ‚Ñ¢s WWE. Like all professional sports, wrestlers are under contract rather than employees. Each year, I had the tax nightmare of having to not only pony up payment for Federal Taxes, I also had to pay State Taxes in EVERY state that I wrestled in. It wasn?¢‚Ǩ‚Ñ¢t uncommon for me to pay State Taxes in 32-38 different states at the end of each year. Thank God I had a good accountant.

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