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There are plenty of great advantages to being self-employed, but there’s one word that often strikes fear into the heart of many freelancers – taxes.

Working out how to save for quarterly estimated taxes can feel like the biggest struggle that you can face as a freelancer. Those three-month deadlines always seem to roll around way quicker than you might expect. 

Rather than panicking as your quarterly tax bill is due, it’s time put in place a plan of attack for dealing with them head-on.  

Finding a system that works for you

The key to saving for your taxes is working out a system that you can stick to. It might take a while to get your system sorted, but this is well worth the effort. The first time I got a quarterly tax bill and had all the money set aside, it felt great. But that moment took years of being self-employed to achieve.  

Don’t feel bad if your system doesn’t stick right away. I’ve fallen off my tax savings wagon quite a few times, and while it’s not a great feeling, I know I have a system to back me up. All I need to do is remember to implement it.

These are the tips that work for me. 

Set aside around 25-30% of your income 

It might sound obvious, but getting into the habit of setting aside a percentage of your income for taxes is an efficient system, and it works.

When you’re an employee, your tax deductions are based on a percentage of your income too. Granted, someone else does the calculations for you, and that tax money never lands in your account, but the theory is the same. 

As a self-employed person, you might need to do some calculations to figure out the exact percentage that suits you and your business, but once you’ve done that you’re good to go. If you’re not sure where to start, look at your tax returns for the last couple of years, and work out what percentage of your net income was made up by tax payments.     

A book that helped me wrap my head around organizing myself to pay taxes, rather than burying my head in the sand, was The Money Book for Freelancers, Part-Timers, and the Self-Employed, by Joseph D’Agnese and Denise Kiernan. 

This book was recommended by a very successful freelance writer I admire. I had the sudden but scary realization that, unlike her, I had no strategy for saving or paying for taxes. At all. That was a wake-up call and made me realize that if I wanted to be successful too, I needed a system. 

Use a dedicated account for taxes 

Keeping money for taxes set aside in a completely separate account from any other funds is a really good idea. If your online banking allows you, call your account something that makes you smile, but also reminds you that money isn’t yours. My tax account is called “Can’t Touch This.” For freelancers too young to remember, that’s the title of a song from 1990, which makes me feel pretty old now. 

As tempting as it might be to dip into your tax savings when you hit a lean month, if it’s in a separate account to your holiday funds or other savings, you’re going to think twice before clicking that “confirm transaction” button. 

I use Wise (which used to be called TransferWise), which allows you to set up unlimited “jars” for savings. I often get paid through Wise anyway, as you can set up local bank accounts in lots of different currencies. It takes me seconds to calculate and transfer a percentage of each invoice into my tax jar. Then I can transfer the remaining funds to my regular checking account. 

Use money management systems 

Financial tools can help you analyze your spending, create a budget, and even track your investments. By keeping everything in one place, you can check to see if you’re on target with your tax savings quickly and easily. 

Finding time-tracking software, accounting programs, and the right business banking accounts all helps to streamline your systems and make figuring out how much to set aside for taxes less of a headache. 

Cash-flow issues are cited as a common reason for businesses to fail. How you choose to operate your business the first few years after launch will be critical to its long-term success. Starting off strong, by getting into the mindset of a business owner, and taking control of your finances is a great way to start!  

Pay your estimated taxes on time

Estimated taxes are due quarterly, although those quarters don’t line up exactly with a calendar year! In the US, the payment deadlines are:

  • April 15
  • June 15
  • September 15
  • January 15 of the following year 

While you can opt to pay your taxes once per year, working out how you’re going to pay that huge bill is even scarier than sitting down and working out a system to get those quarterly tax bills paid on time. 

Remember to save any relevant receipts and deduct those expenses, including anything that helps you run your business. 

Working with an accountant can save a lot of time and effort when it comes to filing your taxes. They know exactly what can and can’t be deducted, and will complete your quarterly returns far more quickly than most of us can do them ourselves! It can be tempting to think we can do everything ourselves, but knowing when to seek help is a strength, not a failure!

The two main things I outsource are taxes and website design. I used to think I should be able to do these myself, and spent hours trying to get to grips with tax returns and WordPress updates. Quickly calculating how much I could have earned in these “lost” hours made me realize that even if I paid someone else to complete those tasks, I’d still be better off than if I tried to do them myself.

Building successful habits 

Just like anything, getting into the new habit of setting aside a percentage of your income takes time. It’s estimated it can take between 18 to 254 days for a new habit to stick. Keep following your new system in the confidence that it’ll soon become second nature.  

Making wise decisions when it comes to setting aside money for taxes means we’ve got more time and energy to dedicate to building our businesses and making them successful. Which is what we’re all aiming for, after all.