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Banking, Collecting, and Saving
We live in a fantasy world, a world of illusion. The great task in life is to find reality.Iris Murdoch
Once your entity is formed, you can take that paperwork to your bank of choice and open a business account. Put your new account number, routing number, SWIFT code, and bank branch address on your invoices. Now your clients can send electronic payments.
One hack I discovered years ago via Ramit Sethi’s book is that many banks will allow you to open multiple savings accounts, nickname them, and link them together. As a person, this helps you save for different goals—car, wedding, vacation, house. As a freelancer, this helps you organize your income, most importantly by setting aside for taxes.
Here’s how I do it:
When a payment comes in, immediately send 35% of it to a savings account named “Taxes.” Why 35%? It’s a bit arbitrary, but the main reason is that it roughly represents the maximum you are likely to need come tax season. If this is imprecise, or even overkill, fine. At the end of the year, a surplus is better than a shortfall.
Do that every month, amassing a tidy pile of money that is reserved for the IRS. Maybe.
Your CPA will help you create and pay quarterly tax estimates, or wait until December to pay it all at once, depending on what type of entity you form.
If all goes well, your deductions could reduce your tax bill, meaning you might not owe the full amount you’ve saved. Examples of deductions:
Your office space or a portion of your rent if you work from home
The things you purchase as reference samples or learning materials
Meals or coffees you buy for clients
Potentially many other things which your CPA will help you identify
If this happens and you have money left over, you can contribute the difference to your SEP IRA (imagine a 401(k), but without the part where your employer chooses non-optimal funds on your behalf and passes the excessive management fees onto you), reducing your tax bill even more, and also making you rich over time. It’s like a wonderful circular turbocharger of wealth building. I’ll write a separate book on the topic. For now, just open a business bank account and follow those three steps.