Track Cash Flow

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1. ObservedJul 11, 2026Conversation3 turnsPlacementAfter turn 03 turns · After turn 0Replay chat
   Observed conversationJul 11, 2026 · interface recreation

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   I just went freelance full-time and I have no idea how to handle my taxes now. What do I need to know?

   Going freelance full-time is a big shift, and taxes are one of the biggest adjustments. The good news is that once you set up a system, it becomes much more manageable.

   Here are the main things to know if you're in the U.S.:

   1. No one is withholding taxes for you anymore

   As a freelancer, you're generally responsible for paying:

   • Federal income tax
   • State income tax (if your state has one)
   • Self-employment tax, which covers the Social Security and Medicare taxes that an employer would normally split with you.

   Self-employment tax is currently 15.3% on eligible earnings, though part of it is deductible when calculating your income tax.

   2. You'll probably need to make quarterly estimated tax payments

   Instead of having taxes taken out of each paycheck, many freelancers pay the IRS four times a year.

   Generally, payments are due around:

   • Mid-April
   • Mid-June
   • Mid-September
   • Mid-January (of the following year)

   If you expect to owe at least $1,000 in federal tax after credits and withholding, estimated payments are often required.

   3. Set money aside from every payment

   A common approach is to transfer 25–35% of every client payment into a separate savings account dedicated to taxes. The exact percentage depends on:

   • Your income
   • Your state taxes
   • Whether you have other income
   • Your deductions

   If your income is relatively high or you live in a high-tax state, you may want to save closer to the higher end.

   4. Keep track of business expenses

   Many ordinary and necessary business expenses can reduce your taxable income, such as:

   • Home office (if you qualify)
   • Computer and equipment
   • Software subscriptions
   • Internet and phone (business portion)
   • Office supplies
   • Professional education
   • Business insurance
   • Mileage or business travel
   • Marketing and advertising

   Good records throughout the year make tax time much easier.

   5. Separate business and personal finances

   Even if you're a sole proprietor, it's usually worth having:

   • A dedicated business checking account
   • A business credit card (if practical)

   This makes bookkeeping and deductions much simpler.

   6. Track your income

   Clients may send you forms (such as a 1099-NEC), but you must report all business income, even if you don't receive a tax form.

   7. Consider bookkeeping software

   Popular options include:

   • QuickBooks
   • FreshBooks
   • Wave (free for many users)
   • Xero

   Even a well-organized spreadsheet is better than waiting until tax season.

   8. Retirement contributions can lower your taxes

   Freelancers often use accounts like:

   • SEP IRA
   • Solo 401(k)
   • SIMPLE IRA (for some situations)

   These can help you save for retirement while potentially reducing your taxable income.

   9. Health insurance may have tax benefits

   If you're self-employed and eligible, you may be able to deduct health insurance premiums you pay for yourself and certain family members, subject to IRS rules.

   A simple monthly routine

   Many freelancers find this workflow effective:

   1. Record all income.
   2. Categorize expenses.
   3. Transfer 25–35% of income into a tax savings account.
   4. Review your profit.
   5. Set aside time before each quarterly estimated payment deadline.

   When it's worth hiring a CPA

   Consider working with a tax professional if:

   • This is your first year freelancing.
   • You'll earn roughly $75,000+ from self-employment.
   • You have multiple income sources.
   • You're unsure how much to pay in estimated taxes.
   • You want help minimizing your tax bill legally.

   A CPA's fee can often pay for itself through tax savings and by helping you avoid penalties.

   If you tell me:

   • What state you live in
   • About how much you expect to make this year from freelancing
   • Whether this is a side business or you've completely left your W-2 job

   I can help estimate how much you should set aside each month and whether quarterly payments are likely to apply in your situation.

   

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   How much should I be setting aside for quarterly estimated taxes? I'm expecting around $80k this year.

   A good starting point for $80,000 of freelance income is to set aside 30–35% of your net business income for taxes.

   Here's why:

   • Self-employment tax is roughly 15.3% on most of your self-employment earnings (subject to IRS rules and deductions).
   • You'll also owe federal income tax, which depends on your total taxable income, filing status, and deductions.
   • You may owe state income tax depending on where you live.

   If the $80,000 is your net profit (after business expenses), here's a rough rule of thumb:

   If your state has...	Conservative amount to save
   No state income tax	About 30% ($24,000 for the year)
   Moderate state income tax	About 32–35% ($25,600–$28,000 for the year)
   High state income tax	About 35–40%

   If you save 30% on $80,000, that's:

   • $24,000 for the year
   • About $6,000 per quarterly payment
   • Or about $2,000 per month into a separate tax savings account.

   A few factors can change that estimate

   The actual amount could be lower or higher depending on:

   • Whether the $80,000 is gross revenue or profit after expenses
   • Your filing status (single, married filing jointly, etc.)
   • Whether you have a spouse with W-2 income and withholding
   • Retirement contributions (such as a Solo 401(k) or SEP IRA)
   • Health insurance deductions
   • Your state's tax rules

   For many first-year freelancers, saving 35% initially is a safe approach. If you later determine you're over-saving, you'll simply have extra money available rather than facing an unexpected tax bill.

   If you share:

   • Which state you live in
   • Whether the $80,000 is gross revenue or net profit
   • Your filing status (single, married filing jointly, etc.)
   • Whether you have any W-2 income this year,

   I can give you a much closer estimate of your federal, self-employment, and state taxes, along with a suggested quarterly payment amount.

   

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   Is it worth setting up an LLC or S-Corp for tax savings, or is that overkill at my income level?

   At around $80,000 of freelance income, it's a question worth asking—but the answer is often "not yet" for an S corporation, while an LLC can make sense for reasons other than taxes.

   Here's how to think about each option:

   LLC: Usually about legal structure, not tax savings

   For a single-owner business, a single-member LLC is generally treated as a sole proprietorship for federal tax purposes unless you elect otherwise. That means:

   • You typically file the same federal tax forms.
   • Your income is generally taxed the same way.
   • You still pay self-employment tax on your business profits.

   People often form an LLC because it can:

   • Help separate personal and business assets (though it's not absolute protection).
   • Look more professional to some clients.
   • Make it easier to grow or bring on partners later.

   So, an LLC by itself usually doesn't reduce your taxes.

   S corporation: Can save taxes—but comes with extra costs

   An S corporation can reduce self-employment taxes because:

   • You pay yourself a reasonable salary, which is subject to payroll taxes.
   • Additional profits can be distributed without self-employment tax (though they're still subject to income tax).

   The catch is that you'll have additional responsibilities and costs, such as:

   • Running payroll.
   • Filing a separate business tax return.
   • Keeping more formal records.
   • Paying for accounting or payroll software.

   Is it worth it at $80k?

   Many tax professionals suggest the numbers start to become more favorable when:

   • Your business consistently earns enough profit to comfortably pay yourself a reasonable salary and
   • The tax savings exceed the added accounting, payroll, and administrative costs.

   At around $80,000 of net profit, you're in a gray area:

   • If your profits are stable and expected to grow, it's worth evaluating.
   • If this is your first year freelancing or your income is uncertain, many people wait another year before making the switch.

   There's no universal income threshold, because the benefit depends on your specific situation, state taxes, what a reasonable salary would be in your field, and the cost of maintaining the S corporation.

   A practical approach

   If you expect to stay around $80k this year:

   1. Focus on good bookkeeping and estimated taxes.
   2. Track your actual profit for a full year.
   3. Near year-end or before next year, ask a CPA to run an S corporation analysis based on your actual numbers.

   A CPA can often estimate the annual tax savings versus the additional compliance costs, making it much easier to decide.

   If you tell me:

   • What type of freelance work you do,
   • What state you're in, and
   • Whether the $80,000 is gross revenue or net profit,

   I can give you a more tailored sense of whether an S corporation is likely to save you money or whether staying a sole proprietor (with or without an LLC) is the more practical choice.

   

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