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Don’t Forget Taxes for Freelance Earnings / Side Income

Who doesn’t love extra earnings from the side hustle? My side income allows me the chance to save a little extra for retirement and make the occasional, frivolous (yet so enjoyable) purchase. Before I started making a little bit of money from self-employment income, however, I never realized that freelancers are responsible for 100% of their taxes.

When you are a W2 employee, your payroll taxes (normally 6.2%, 4.2% for 2011) are automatically taken out of your paycheck. The employer pays another 6.2% payroll tax. The difference between 1099 vs. W-2 is that as a 1099 employee (i.e. you make freelance income), you are responsible for the full employer and employee portion of the payroll tax. So while I am happy whenever I see a freelance check, I have to caution myself that my net earnings is significantly lower than the gross number.

If I don’t remember to set aside some money for taxes, I will be in for a rude surprise come spring time. For now I’ve been putting 25% from every check into a special account I’ve earmarked just for taxes (I believe I’ve named this account The Tax Man Commeth. I crack myself up!). I think this is enough, but I won’t know how much taxes I need to pay until I file. To err on the side oversaving for taxes, I know freelancers who put away 30% to 40% of their income for tax time.

Do you have a special account for freelance taxes? What percentage of your gross do you put away for taxes?

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