With great freedom (to work when and where you want) comes great responsibility (to pay taxes).
When we decide to work for ourselves or work remotely for another company, we get a bundle of income tax headaches … and a few opportunities to save. We’re suddenly the bell at the ball and everyone’s lined up to dance with us, to take a sliver of our income back to their coffers.
So what can you do to protect your hard-earned money? Here’s 3 tips.
1. Research the tax laws and look for double tax agreements
This one’s for the travelers. For the digital nomads working as they travel across state and national borders, the tax headaches can quickly become migraines.
If you live in a state with no income tax and work as an employee for a company based in a state with income tax, you have to pay taxes to that state. When you’re a citizen of one country, but live in and work in another, you may have to pay taxes to both countries — or you may find that the countries have a double tax agreement.
Personal Finance & Money StackExchange is an international community of folks who’ve either already asked and answered the same questions we have or are ready to answer our questions. With the popularity and accessibility of mobile working on the rise, there are also active communities of globe trotting digital nomads and veteran road warriors happy to share what they’ve learned. Nomad.io and Nomadtopia.com are great examples.
2. TME (tee-ehm-ee)
Now we get to look at a way we can save money. Like shopping, you save by spending. When you start your business, you’re constantly meeting with people — customers, advisers, friends, you name it. And when you work out of coffee shops, those meetings out can add up.
Do yourself a favor and save your receipts. Make a brief scribble including who you met with and the topic of your conversation. I’ve tried almost every app you can think of, from ones that let you scan receipts to ones where you enter your purchases as you make them and ultimately what works best for me is taking a picture of my receipt on my phone and then stashing the receipt in an envelope that I rummage through once a month as I do my bookkeeping.
Why the phone over all those awesome apps? It’s easy. One snap and it’s geocoded and timestamped and easy to browse.
Because I’m not a tax consultant and tax laws vary internationally, I won’t go into what expenses you can write off, but I recommend checking out this simple overview of Meals & Entertainment deductions in the states. And if that bores you to tears, don’t worry about. Save your receipts with handy notes on them and give them to your bookkeeper — they’ll know what to do with them.
3. Estimate your overhead when calculating your rates and assessing an employment offer
When you’re working as a w2 employee in the states, you’re only responsible for paying 1/2 of your federal income taxes because your employer pays the other half. When you’re a freelancer, you’re responsible for paying both halves, so you can expect your taxes to increase.
As a quick starting guide, I recommend figuring out what you want to “take home” in pay and then multiplying that by 1.5. This will be your new baseline — what you need to bill in order to take home what you want. BIG RED WARNING: This is a rough number I’ve used while having to pay county, state and federal taxes in Oregon and I am NOT NOT NOT a tax consultant. Your local and national tax responsibilities will vary, so if you don’t know what your tax liabilities will be, ask around BEFORE you set your rate and salary.
Take out as you earn
Now that you’ve calculated the difference between what you have to charge and what you get to take home, you can save the difference so you have the funds to pay when taxes are due (quarterly and/or annually, depending on where you live). One new company that promises to make this easier is Painless 1099.
They open an online “smart” bank account and automatically withhold taxes from each deposit and send what is safe to spend directly to your personal checking account. Contractors can then simply use their Painless 1099 account info when setting up direct deposit or remote depositing payments received from freelance work.
They’re currently planning a beta launch for early to mid March 2015 and if you’re reading this, you should hurry up and get on their beta list!
Bonus. Find a good tax consultant.
Because it’s important yet redundant, I’m throwing this one in as a bonus. Find a good accountant, tax lawyer or tax preparer. Ask your friends, ask on Facebook, ask on Twitter. There’s a reason you hear this advice repeatedly. Save yourself time and money and prepare your questions before you meet.
Protecting as much of your hard-earned money as possible is the best investment you can make.