How Much to Set Aside for Taxes for Freelancing

IRS rules as of February 2011 state that if you net $400 or more from freelancing, you must file a tax return. This likely comes as no surprise. However, the amount to set aside for taxes varies based on a few considerations. Keep in mind that percentages, credits, exemptions and other factors that may affect tax amounts change from year to year. Keep yourself informed or consult a tax professional experienced in freelance income reporting to verify that your information is current.


Self-Employment Taxes

When you receive a paycheck from an employer, you will notice that a certain percentage of your income is deducted from each paycheck for Social Security and Medicare. That employer matches the amount deducted from your paycheck, which as of the 2010 tax year, is 6.2 percent. As a self-employed person, you are responsible for paying both sides of the federal tax equation yourself --- all 12.4 percent of it. For the 2011 tax year, a 2 percent reduction in Social Security tax was signed into law by President Obama, provided your total income is under $106,800. If you make more than $106,800 in 2011, income up to that amount receives the 2 percent reduction, but income over that amount does not.
 
State and Local Taxes

State taxes vary widely across the country. Depending on where you live, other local taxes may apply to your situation, as well. Check your state and local revenue service offices to formulate a rough estimate of what taxes you will be expected to pay. If you need a starting point of reference, and you have lived in your current location long enough to have filed a tax return last year, consult that tax return. A consultation with a local tax professional may be an invaluable asset as well, even if you only consult once and opt to handle your taxes yourself.
 
Estimated Quarterly Taxes

At the federal level, the IRS requires you to pay estimated quarterly taxes if you believe you will owe more than $1000 in federal taxes for the coming tax year. To calculate whether you are required to file these taxes, consult IRS Form 1040-ES for the current tax year. Estimated quarterly taxes function like payroll taxes do when you work for an employer and allow you to pay self-employment tax in increments, rather than one lump sum on the April 15th annual tax deadline. Keep in mind that you may still owe money on your annual tax return, since your payments are only estimates. However, you should also know that if you should be paying estimated quarterly taxes but do not, you may owe penalties.
 
Savings Account

Since taxes are figured in percentages, add together the percentage you owe the IRS with your state and local tax rates for the same calendar year. Round your total up to an even number, such as 25, 30 or even 40 percent. Open a separate savings account, preferably with a good interest rate, and stick that amount in your savings account every single time you receive a freelancing payment. That way, you only have to worry about filing your tax returns and making estimated payments on time --- not about where the money will come from. The interest you make on the savings account will be yours, as will any extra money in that account that is left over after taxes.