Sixteen years ago, at the end of my first year as a full-time freelancer, I did my taxes and discovered that I owed the IRS $1,600. Once I picked my jaw off the floor and figured out how I was going to scrape that large sum together on short notice, I made a vow that I would create a system that would prevent this from happening again.
I'm here to warn you now: If you're just starting off freelancing or making money from Uber, AirBnB or any other aspect of the gig economy, you're in danger of running into the same problem — or, based on some stories I've researched, worse. But many people go into their freelancing careers completely unprepared for the tax situations they'll encounter.
"I've heard horrible advice from some CPAs advising new freelance workers, like, 'Don't worry about estimated payments because you can earn more by investing it,'" says Nick Holeman, a Certified Financial Planner at Betterment. "To the newbie freelancer, this is awful advice.
"Human beings are awful at accounting for lump sum costs and do much better if you pay a little at a time. From a behavioral finance perspective, and from a budgeting perspective, paying as you go is a much better system than waiting until the end."