Adjusting My 2015 Budget To Accommodate Freelancer Estimated Taxes

Yesterday, I wrote about learning that my 2014 tax burden included an additional $5,443, plus the recommendation to start saving 20 percent of my freelance income for 2015 taxes, or approximately $1,000 per month.

“Now wait a minute,” you might think, “why did you not assume you would need to save 20 percent of your freelance income for taxes?” Because I had a series of estimated tax vouchers that suggested I’d have to pay much less than that. And who knows — maybe I was in a lower tax bracket when my CPA figured those vouchers, and I’ve bumped up to a higher one since. So let’s not think too much about the past: let’s focus on the future.

My initial reaction, when I learned that I’d need to put aside 20 percent of my income for taxes, was “wow, I’m not going to be able to save anything and I’m not going to be able to move into a better apartment.” On closer inspection, I think only one of those is true.

Here’s what I know about my income, my fixed expenses, and my tax burden: Some of these numbers are taken from when I factored my 2015 budget earlier this year. Some of them are changed, because my life has changed a bit since then. (For example, I am no longer enrolled in either therapy or Hulu Plus.)

— Rent (inc. utilities): $675

— Health insurance: $212

— Smartphone: $90

— Internet: $75

— Groceries: $350

— Bus: $30

— Renters insurance: $14.75

Total fixed expenses: $1,446.75, which we will round up to $1,500.

My goal each month is to earn $5,000 in freelance income, and if you’re following my income tracking on The Write Life, you can see that I’m definitely hitting my goals. So what if I was to think of my monthly budget as something like this:

— Taxes: $1,000

— Debt: $1,000

— Savings: $500

— Fixed expenses: $1,500

— Left over: $1,000

That looks great, right? Everything gets paid off, I get to start saving again, and I get $1,000 in discretionary income per month.

Except freelance income doesn’t work like that. Just because I “earn” $5,000 in a month doesn’t mean I receive $5,000 every month. There is always some client who works on a 60-day cycle, or who only sends the check after the article is published, which could be months from now. In February, for example, I earned $4,980 but only received $4,358.

So I decided to look at my budget in a different way. For every month, I need to divide my money as follows:

— Taxes: 20 percent

— Debt: 20 percent

— Savings: 10 percent

— Fixed expenses: $1,500

— Left over: TBD

If I had done February according to this plan, the money would have worked out as follows:

— Taxes: $872

— Debt: $872

— Savings: $436

— Fixed expenses: $1,500

— Left over: $678

That’s still great, though, right? Easy breezy lemon squeezy? New apartment for sure? Yeah, that’s what I thought too — until I started writing down all of the commitments I had made for the rest of the year:

— April: Norwescon, FilkOntario (these are both “tax deduction gigs,” and all I have to pay out of pocket are extraneous food and airplane baggage costs, but that $25 per checked bag adds up)

— May: Whiskey Fest in Portland (this is not a tax deduction, it’s a friendcation), also non-health-insurance-covered eye appointment and probably new glasses

— June: Family reunion in Portland

And so on, all the way to the ridiculously expensive plane ticket that is waiting for me at Christmas.

So I don’t think it’s smart to plan what I am going to do with the “left over” money just yet, since it looks like I’m going to need it for upcoming expenses — not to mention the general “life expenses” of grabbing dinner with a friend or buying a new pair of shoes when your old ones wear out.

I do, however, think it is smart to try the “20 percent taxes, 20 percent debt, 10 percent savings” method, and I have already set up the appropriate sub-accounts in my Capital One 360 online banking system. I have also already decided how to transfer money into these accounts: every Friday, when I do my weekly income roundup on my Tumblr, I’ll look at the freelancing payments that have hit my bank account that week and put 20 percent into the taxes account, 20 percent into the debt account, and 10 percent into the savings account.

The one drawback to this plan is that it doesn’t cover First Quarter Estimated Taxes, which are due on April 15. So we’ll look at how I’m going to pay those tomorrow.

And then we’ll see if this savings method works, because I really, really, really want to get my finances into good shape this year. Even more than I want to move into a new apartment.

This story is part of our Tax Month series.