What do you do about income taxes on money from freelance projects?

First thing, I would hire accountants. It's not as costly as it sounds, and aside from helping you prepare your taxes at the end of the year they keep up to date on all of the rules and changes and tax laws associated with freelancing, which change constantly. You've also got them in your corner year round, which definitely is going to come in handy, because you'll be paying taxes quarterly. No matter how many times I fill out that stupid Schedule C, I always have new questions.

You'll also (probably) be trying to itemize deductions to maximize your tax refund, and the rules for things like home offices and business vehicles are a bit touchy. That doesn't mean don't try - just hire someone to help you. I use www.foxtax.com. They specialize in tax prep for artists, and they are awesome. Rates are even on the website.

In terms of planning, you are both the employer and employee. When you're retained as staff by a company, you pay X amount of taxes on the income you earn, and then the company matches that. For example, the last job I had I paid approximately 11% on the income I earned. The company then matched that - in effect the government got 22% on my paycheck. Tax withholdings are different for every job and every person but you can probably pull out an old paystub and figure out what you were paying. Then double that. That's what you want to save.

As a freelancer, you don't have the company to match you. In this example you'd be responsible for forking over 22% of your paycheck. The habit I got into is setting a fixed percent - for me it's 25% - and automatically scraping that money into a separate account the minute the paycheck clears in my checking. Just pretend it's not even there. If you charge $1000 for a project, get used to thinking that that equals approximately an $800 payday.

That money covers not only my quarterly taxes (which include your income tax) and any state small business fees, but also the fees I pay to my accountants, which incidentally, are tax deductible as well.

You report your income on a Schedule C. Here is the official IRS website with forms for you - http://www.irs.gov/businesses/small/article/0,,id=115043,00.html.

There's lots of jargon, of course, but basically you guess what your taxes are based on what you paid last year and then you look up some number on a chart that tells you what you owe.

The advantage to paying quarterly (I've found) is that even though it feels like a lot, come year end when you have your awesome accountants go through for you and work on maximizing your deductions, you get a healthy chunk back. And as you get better and better at identifying deductions and managing your income, the refund grows. Eventually, if you're so inclined you can opt to NOT receive your refund, in effect committing it towards what you owe on estimated taxes next year.

I find this technique works well for me - some people loathe the idea of giving the IRS an interest free refund (which is what happens when you pay in advance) but if I have money in my hands I spend it - it's way more fun to buy wine and records and expensive shoes etc, etc, etc...than pay taxes. Booooring.

So, that was long winded. Here's a recap:

1. Hire accountants
2. Set aside a portion of your paycheck for taxes immediately
3. Save your receipts and hunt for deductions

If anyone has any other advice or techniques they've been using, I'd love to hear 'em----