I’m having a lot of new experiences living here at Karmê Chöling, a meditation retreat center, in northern Vermont.
Sleeping in a dorm, living with around 40 other full-time staff members, having my “home” filled with a constant stream of people from all over the world, avoiding deer ticks like the plague, traveling an hour to get a bowl of Vietnamese pho… it’s all strange and exciting.
I’m also freelancing regularly for the first time in my life. In fact, the majority of my income comes from my freelance marketing and writing work, as I’m only paid a small stipend by the retreat center.
It’s very exciting to be starting up my own little business and exploring a new way of supporting myself. Letting go of my traditional life plans and being open to what comes up has led to many lucrative opportunities for me.
But it also means I have to dive into the intimidating world of quarterly taxes – something not many Millennials are familiar with.
However, this isn’t as complicated as I first thought – especially since I got help.
Be Your Own Payroll
One of the biggest and most common mistakes any young freelancer could make is not putting aside a portion of their income for taxes.
If you’re on a payroll, some of the income you earn is automatically deducted and sent to the federal and state governments. Your employer also covers half of your federal tax liability, so you only pay out 7.65% per paycheck.
But, if you’re freelancing, that’s not the case. It’s all on you.
Estimating and paying the amount of tax owed on a quarterly basis is a popular method used by freelancers because it spreads out the amount you pay over the course of the year.
The alternative is setting aside money all year, and then paying everything you owe at once in April.
The problem with this is, you don’t know exactly how much you owe until you file. Most people also don’t feel comfortable holding (and owing) such a large and inexact amount in their bank accounts.
I’m in that boat, which is why I decided to figure out how to pay my taxes on a quarterly basis.
Paying the Man
Of course, I had no idea how to go about doing this, or how to estimate how much I might owe. So, I went to my local H&R Block and had Jennifer Webster, the manager of the St. Johnsbury center, explain it to me:
“The Federal Taxation is a pay-as-you-go, or earn, system not a pay-as-you-owe,” said Webster. “So, by having self-employment income you need to estimate your tax liability on your earnings and send it in to the government so that they have the funds to use.”
Paying my estimated taxes on a quarterly basis is actually not all that different from the way my taxes have been deducted in the past. I just have to be a little more involved.
You see, if you are on a payroll, the amount taken out of your paycheck every two weeks is an estimate, too. It’s based on the exceptions claimed in the W2 form we all fill out when we start a new job.
There’s no way to know exactly how much you’ll owe because no one can be completely sure about their income and exemptions over the course of the following year. Most people over pay, hence the much-appreciated yearly tax return.
When I pay my first quarter at the beginning of June (I missed my chance in April), I will also be making a guess about what I might owe at the end of the year.
Webster suggested I put away around 25% of everything I earn. That’s 19% allocated to the federal government and 6% to the state of Vermont.
When it comes time to pay, I’ll send the federal government a check for the amount I’ve put away – minus any expenses. Webster pointed out that I could also deduct the mileage from where I live to her office, since our appointment counts as research for an article.
In April, I’ll file a tax return just like everyone else to reconcile what I made and paid in.
“The goal is to get a little back,” said Webster.