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.
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[...] This post was mentioned on Twitter by Well Heeled Blog and IRS Refund. IRS Refund said: RT @wellheeledblog Taxes for Freelance Earnings | Well Heeled Blog http://bit.ly/fa50Cz [...]
[...] with every freelance paycheck I get I contribute to my estimated tax fund. This minimizes the free cash that’s lying in my checking account (less spending!) and will [...]
[...] time when you will calculate your recent income and expenses, and make sure to put aside at least 25% of each payment received for your estimated quarterly taxes. As a freelancer, you do not have a boss, but you must function [...]