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The Best Way To Budget For Taxes When You Are Self-Employed

Here are the tips I recommend to help you budget while self-employed.

Finance

Oh, the infamous tax season!

For some, it's a time to celebrate the possibility of having a little extra in your bank account to save spend at your leisure, but for the self-employed, dealing with taxes can be a bit of a headache. Unless you're a stickler for paying your taxes monthly or even quarterly, you may have gotten hit with the possibility of emptying out your life savings (because of course you should have some!) in effort to keep the IRS from hunting you down.

I'm often asked about how to stick to a budget and save for taxes as a person who's self-employed. For many entrepreneurs, there is no guarantee that each month will yield the same profit as the one before. So what do you do when your paycheck fluctuates just as much as the stock market?

As a self-employed sista myself, I know just how hard it is to budget and save with sporadic income. The first year of self-employment was rocky for me on the money front too, so you're not alone. I'm happy to tell you budgeting while self-employed is much easier now that I have a system in place.

Here are the tips I recommend to help you budget while self-employed.

1. Add Up Your Basic Needs

The basic needs include food, shelter and anything that keeps you alive. Drinks with your girlfriends or Friday night takeout are not basics. They do have a place in your budget, just not here. Add up all of the bare essentials and it'll give you how much income you need to make from your business (after business expenses like taxes) to maintain your life.

2. Use Percentages to Budget

People that get a regular check can allocate a certain amount of money to each line item of their budget. That doesn't work for us self-employed folk because our income is variable. Use percentages instead, here's the breakdown I use:

  • 40%: Expenses - Both essential and nonessential expenses.
  • 30%: Taxes - As advised by my accountant due to business expenses. Remember, every tax situation is different. You need to speak with a tax advisor first before choosing your own tax percentage. This all depends on your tax bracket and how much you spend on business expenses. Make sure you're setting aside a percentage of your income each time you get paid to avoid a future tax bill you can't afford.
  • 15%: Retirement & Investments - It's critical that you set aside money for your future self, especially since you don't have a job sponsored retirement plan.
  • 10%: Give - Donating and giving back. I believe to whom much is given, much is required. I've also found that giving activates abundance is all areas of my life, but this is a personal choice, so do what you feel is right.
  • 5%: Travel - Leisure - Traveling is important to me, so I give it its own budget category. Decide what category is important to you. Then each time you get paid (big payment or small), allocate your income based on the percentages you choose.

3. Keep Multiple Accounts

Keep your money separate. It's easier to keep track of your funds this way. Setup and label a few online bank accounts for taxes, bills, everyday spending and savings goals. (You can find online accounts with no fees at MagnifyMoney). Divvy the money up into each account when you get paid.

The account for spending can be your regular checking account. Your bill money should be in an account you can't touch, same with your savings and tax money.

4. Pay Your Quarterly Taxes

I've been asked about saving for taxes specifically, so I'm touching on it a little more in this section. Each fiscal quarter self-employed workers are supposed to make estimated quarterly tax payments to the IRS. I'm going to be honest with you, it's easy for solopreneurs to spend money that trickles in and put off saving for taxes entirely. This never ends well. Believe me. I didn't stay on top of quarterly tax payments my first year as an entrepreneur. Then when tax season rolled around, I had to scramble for money to pay my tax bill. To say it was stressful is an understatement.

Now I consider quarterly tax payments a godsend. You can't spend tax money if it's already sent to Uncle Sam. Commit to the percentages we talked about above. Pay your taxes in smaller installments to avoid a huge tax bill later. You'll be thankful you did.

5. Stockpile Excess Cash

Moving on to the perils of feast and famine. Money won't come in for weeks and then a $10,000 check will appear mail; that's the life of an entrepreneur. My business is the busiest during summer months, so I work hard during that time to stockpile cash in a business savings account. This way, I don't have to panic during the winter when the checks slow down. Instead, I use the money from my savings account to pay myself. If you have a peak season make sure you're putting in work and saving large windfall payments that come in.

6. Give Yourself a Paycheck

You may wonder where your income disappears to each month right now and that's okay. Get serious about dispersing your income from each client into your budget categories like we discussed, and cut back on nonessentials so you can start saving more. Your ultimate goal is to get to the point where you can pay yourself a “regular" paycheck. Once you have enough cash in your business account to give yourself wiggle room, pay yourself a weekly or biweekly check from the savings. This way you're no longer at the mercy of irregular checks from clients.

In closing, Sista girl… It's a challenge to budget in the traditional sense when you're self-employed, but it can be done. Good luck!

Have more money questions? Ask below! I'm here to help you to live richer.

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ACLU By ACLUSponsored

Over the past four years, we grew accustomed to a regular barrage of blatant, segregationist-style racism from the White House. Donald Trump tweeted that “the Squad," four Democratic Congresswomen who are Black, Latinx, and South Asian, should “go back" to the “corrupt" countries they came from; that same year, he called Elizabeth Warren “Pocahontas," mocking her belief that she might be descended from Native American ancestors.

But as outrageous as the racist comments Trump regularly spewed were, the racially unjust governmental actions his administration took and, in the case of COVID-19, didn't take, impacted millions more — especially Black and Brown people.

To begin to heal and move toward real racial justice, we must address not only the harms of the past four years, but also the harms tracing back to this country's origins. Racism has played an active role in the creation of our systems of education, health care, ownership, and employment, and virtually every other facet of life since this nation's founding.

Our history has shown us that it's not enough to take racist policies off the books if we are going to achieve true justice. Those past policies have structured our society and created deeply-rooted patterns and practices that can only be disrupted and reformed with new policies of similar strength and efficacy. In short, a systemic problem requires a systemic solution. To combat systemic racism, we must pursue systemic equality.

What is Systemic Racism?

A system is a collection of elements that are organized for a common purpose. Racism in America is a system that combines economic, political, and social components. That system specifically disempowers and disenfranchises Black people, while maintaining and expanding implicit and explicit advantages for white people, leading to better opportunities in jobs, education, and housing, and discrimination in the criminal legal system. For example, the country's voting systems empower white voters at the expense of voters of color, resulting in an unequal system of governance in which those communities have little voice and representation, even in policies that directly impact them.

Systemic Equality is a Systemic Solution

In the years ahead, the ACLU will pursue administrative and legislative campaigns targeting the Biden-Harris administration and Congress. We will leverage legal advocacy to dismantle systemic barriers, and will work with our affiliates to change policies nearer to the communities most harmed by these legacies. The goal is to build a nation where every person can achieve their highest potential, unhampered by structural and institutional racism.

To begin, in 2021, we believe the Biden administration and Congress should take the following crucial steps to advance systemic equality:

Voting Rights

The administration must issue an executive order creating a Justice Department lead staff position on voting rights violations in every U.S. Attorney office. We are seeing a flood of unlawful restrictions on voting across the country, and at every level of state and local government. This nationwide problem requires nationwide investigatory and enforcement resources. Even if it requires new training and approval protocols, a new voting rights enforcement program with the participation of all 93 U.S. Attorney offices is the best way to help ensure nationwide enforcement of voting rights laws.

These assistant U.S. attorneys should begin by ensuring that every American in the custody of the Bureau of Prisons who is eligible to vote can vote, and monitor the Census and redistricting process to fight the dilution of voting power in communities of color.

We are also calling on Congress to pass the John Lewis Voting Rights Advancement Act to finally create a fair and equal national voting system, the cause for which John Lewis devoted his life.

Student Debt

Black borrowers pay more than other students for the same degrees, and graduate with an average of $7,400 more in debt than their white peers. In the years following graduation, the debt gap more than triples. Nearly half of Black borrowers will default within 12 years. In other words, for Black Americans, the American dream costs more. Last week, Majority Leader Chuck Schumer and Sen. Elizabeth Warren, along with House Reps. Ayanna Pressley, Maxine Waters, and others, called on President Biden to cancel up to $50,000 in federal student loan debt per borrower.

We couldn't agree more. By forgiving $50,000 of student debt, President Biden can unleash pent up economic potential in Black communities, while relieving them of a burden that forestalls so many hopes and dreams. Black women in particular will benefit from this executive action, as they are proportionately the most indebted group of all Americans.

Postal Banking

In both low and high income majority-Black communities, traditional bank branches are 50 percent more likely to close than in white communities. The result is that nearly 50 percent of Black Americans are unbanked or underbanked, and many pay more than $2,000 in fees associated with subprime financial institutions. Over their lifetime, those fees can add up to as much as two years of annual income for the average Black family.

The U.S. Postal Service can and should meet this crisis by providing competitive, low-cost financial services to help advance economic equality. We call on President Biden to appoint new members to the Postal Board of Governors so that the Post Office can do the work of providing essential services to every American.

Fair Housing

Across the country, millions of people are living in communities of concentrated poverty, including 26 percent of all Black children. The Biden administration should again implement the 2015 Affirmatively Furthering Fair Housing rule, which required localities that receive federal funds for housing to investigate and address barriers to fair housing and patterns or practices that promote bias. In 1980, the average Black person lived in a neighborhood that was 62 percent Black and 31 percent white. By 2010, the average Black person's neighborhood was 48 percent Black and 34 percent white. Reinstating the Obama-era Fair Housing Rule will combat this ongoing segregation and set us on a path to true integration.

Congress should also pass the American Housing and Economic Mobility Act, or a similar measure, to finally redress the legacy of redlining and break down the walls of segregation once and for all.

Broadband Access

To realize broadband's potential to benefit our democracy and connect us to one another, all people in the United States must have equal access and broadband must be made affordable for the most vulnerable. Yet today, 15 percent of American households with school-age children do not have subscriptions to any form of broadband, including one-quarter of Black households (an additional 23 percent of African Americans are “smartphone-only" internet users, meaning they lack traditional home broadband service but do own a smartphone, which is insufficient to attend class, do homework, or apply for a job). The Biden administration, Federal Communications Commission, and Congress must develop and implement plans to increase funding for broadband to expand universal access.

Enhanced, Refundable Child Tax Credits

The United States faces a crisis of child poverty. Seventeen percent of all American children are impoverished — a rate higher than not just peer nations like Canada and the U.K., but Mexico and Russia as well. Currently, more than 50 percent of Black and Latinx children in the U.S. do not qualify for the full benefit, compared to 23 percent of white children, and nearly one in five Black children do not receive any credit at all.

To combat this crisis, President Biden and Congress should enhance the child tax credit and make it fully refundable. If we enhance the child tax credit, we can cut child poverty by 40 percent and instantly lift over 50 percent of Black children out of poverty.

Reparations

We cannot repair harms that we have not fully diagnosed. We must commit to a thorough examination of the impact of the legacy of chattel slavery on racial inequality today. In 2021, Congress must pass H.R. 40, which would establish a commission to study reparations and make recommendations for Black Americans.

The Long View

For the past century, the ACLU has fought for racial justice in legislatures and in courts, including through several landmark Supreme Court cases. While the court has not always ruled in favor of racial justice, incremental wins throughout history have helped to chip away at different forms of racism such as school segregation ( Brown v. Board), racial bias in the criminal legal system (Powell v. Alabama, i.e. the Scottsboro Boys), and marriage inequality (Loving v. Virginia). While these landmark victories initiated necessary reforms, they were only a starting point.

Systemic racism continues to pervade the lives of Black people through voter suppression, lack of financial services, housing discrimination, and other areas. More than anything, doing this work has taught the ACLU that we must fight on every front in order to overcome our country's legacies of racism. That is what our Systemic Equality agenda is all about.

In the weeks ahead, we will both expand on our views of why these campaigns are crucial to systemic equality and signal the path this country must take. We will also dive into our work to build organizing, advocacy, and legal power in the South — a region with a unique history of racial oppression and violence alongside a rich history of antiracist organizing and advocacy. We are committed to four principles throughout this campaign: reconciliation, access, prosperity, and empowerment. We hope that our actions can meet our ambition to, as Dr. King said, lead this nation to live out the true meaning of its creed.

What you can do:
Take the pledge: Systemic Equality Agenda
Sign up

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