A little budgeting mistake can cost freelancers a lot of money at tax time. But don’t worry — you have ways to cover an unexpected tax bill.
Taxes Are a Reality of Freelancing
Being a freelancer comes with a lot of flexibility — you get to choose when you work, with whom you work, and where you set up an office. In exchange for these freedoms, you have to take on some unique responsibilities that most status employees never have to think about.
One of the biggest ones is paying taxes. In addition to the typical income tax that everyone pays, you also must cover self-employment tax. This additional tax covers payments into Social Security and Medicare — two deductions that come off employee paychecks automatically.
Your freelancing tax is roughly 15% of your annual earnings. ax experts always recommend saving this amount from every invoice, setting it aside in a savings account until tax time.
But what if you forgot to do that? Or has nobody ever told you to do that with your freelancing side gig? Unfortunately, you can’t use this as an excuse to get out of your taxes. You still have to pay them.
With a big expense you weren’t expecting, a tax bill can be tough to handle. Here’s what you can do.
Get in Touch with the IRS
You need to tell the IRS that you can’t pay your taxes. By informing them of the situation, you can take the next step and ask for a payment program. The IRS offers payment plans that extend the deadline, giving you more time to pay off your bill.
Generally speaking, there are two types of extensions: short and long-term.
Short-Term: If you qualify, you get an extra 120 days to pay off your bill. During this time, you will accrue interest and penalties until you pay off what you owe.
Long-Term: The longest long-term plan is 72 months. In addition to penalties and interest, you may have to pay a fee for opting into this long-term plan.
Tap into Credit Wisely
Putting your tax bill on your credit card might be an option in certain circumstances, like when you have space on this account, and you know you can pay your bill soon.
What does timing have to do with it? If you can’t pay off your balance by the due date, your tax expense will accrue more interest. Depending on your account, your interest may be more here than the penalty placed by the IRS.
Let’s say you expect a client to pay a bill by the end of the month before your due date. Tapping into credit might work under these circumstances.
But what if your card is too full to cover the extra expense? If you don’t have credit available, you might be able to find a backup product in an installment loan or line of credit. To learn the difference between these online loans, check out a website like MoneyKey. These products come with terms and conditions, so it’s best to choose the one that fits your needs closest.
Next Year, Save for Tax Season
You have to pay taxes as a freelancer — whether you’re a consultant, affiliate marketer, or graphic designer. Now you’ve gone through the motions, you can prepare for next year. Save a portion of every invoice for taxes. If you aren’t sure how much you should save, talk to a tax professional.