Today’s article is for all my self-employed peeps: The independent contractors, the freelancers, those working side-hustles, and everyone running a small or mid-size business. You know that payment you just got for all your hard work? Well, all that money isn’t yours. Who else has claim to that money? The taxman! Yep, the taxman cometh and he’s gonna have his hand out soon so you prepare properly today. Let’s look at a few ways how.
The Taxman Cometh And His Friends
When people think about taxes they think of the IRS and the Federal Government. Although that’s the biggest and baddest taxman he has a bunch of friends that you need to look out for too.
His first friend is the State Income Tax. Now this friend is kinda weird because he goes to some states but not others. So you may or may not have to pay your due depending where you live. However, there is another friend that lives in every state and that’s the Sales & Use Tax guy. And this dude is practically everywhere. It doesn’t matter if you sell goods and/or services, this friend pops up and will demand his share.
The final friend of the taxman is the Local Income Tax. This friend shows up in some states in the country, mostly in the North, maybe because he likes the cold weather. I don’t know.
The Taxman Cometh And Here’s How You Prepare
The taxman cometh and I’m going to give you some tips on how to prepare:
- Set aside 30% of your income to pay Federal Tax
- Determine how much to set aside for State Income Tax
- Use software to collect and remit Sales & Use Tax
When it comes to how I prepare for the taxman I put aside 30% of each of my sales into a reserve account in my bank. If you use a savings account you can earn interest until you have to pull out the money to pay the government.
As for State Income Tax I set aside 5% of each of sales into a separate reserve account. While this amount may be too high for my situation I rather save more than save less. Plus, if I overpay then I’ll get a refund.
Finally, use software to collect and remit Sales & Use Tax. If you collect it properly you will probably not only get in trouble with your city and/or state but you’ll still have to pay it! I use TaxJar and it works pretty darn good. I wrote a review on my other blog which you can read here.
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