Have you earned more than $5,000 as a freelancer this year? If so you’ll probably end up owing more than $1,000 in taxes, which means that the IRS will expect you to pay “estimated taxes” 4 times a year. As an Independent Contractor you receive your earnings without paying any tax. Employees pay taxes every paycheck through withholding so although this may seem unfair it actually means you’re paying taxes less frequently than the average American (head over to our post on Understanding Your Taxes as a Freelancer to learn more). Although that’s certainly nice, calculating and keeping up with Estimated taxes Payment can be a real pain. You can find the latest guidelines from the IRS here.
The 4 tax periods break down like this:
Estimated Payment Pay Period Taxes Due
Payment 1 : Jan 1 – Mar 31 – Apr 15
Payment 2: Apr 1 – May 31 – Jun 15
Payment 3: Jun 1 – Aug 31 – Sep 15
Payment 4: Sep 1 – Dec 31 – Jan 15 (following year)
Before your estimated payment is due you’ll need to fill out a 1040-ES (Estimated Taxes) to figure out how much to pay and then either pay electronically through the IRS’s website or send the government a check in the mail. You can find the proper form directly from the IRS here. The IRS doesn’t expect you to be 100% accurate with each payment and at the end of the year you’ll reconcile your estimated payments with your tax bill. Generally it’s best to err on the side of over-paying so if anything you’ll receive a refund, but if you’ve been staying on top of your taxes you shouldn’t expect much of a variance (refund or payment).
Is There a Quick Way to Calculate Estimated Taxes?
The IRS actually has a “Safe Harbor” rule that gives individuals a quick way to ensure you stay on the right side of your tax obligation. There are 2 ways to satisfy this rule:
- Pay at least 100% of the tax shown on the return for the previous year (110% if you made more than $150,000)
- Pay at least 90% of the tax owed for the current year
As you can imagine it’s a lot easier to know what 100% of last year’s taxes is than what 90% of this year’s taxes is. In other words you can take the amount you paid in taxes last year and break it into 4 estimated payments and it’s highly likely you’ll be safe from the IRS charging you any penalties or interest. You can read more about the Safe Harbor Rule here. Also if you owe less than $1,000 in taxes you generally will not have to pay a penalty.
How Do I Pay Estimated Taxes?
- Use software like TurboTax or Everlance (tax functionality coming soon!) to help you
- Pay online via IRS Direct Pay or EFTPS (Using EFTPS you’ll need a PIN to be physically sent to you to set up the process)
- Pay with a check in the mail. You can find the right address (varies by state) on your1040-ES form
What Happens if you Don’t Pay Estimated Tax?
If you haven’t paid any Estimated Tax (or paid too little) then you’ll have to pay interest on the missing taxes as well as a penalty. The exact rate varies from individual to individual but can be well over 6% and is something that is definitely best to avoid if possible. In the unfortunate event that you did not make the required payment because of a disaster or some other unusual circumstance and you can make a case that you were not “willfully negligent” the IRS will waive the penalty. For more information head over to Topic 306 – Penalty of Estimated Tax.
Taxes are a pain — we hear you and that’s why we’ve built Everlance. In addition to making your life easier with Everlance you can:
- Make more money
- Save time
- Protect yourself against an IRS audit
Disclaimer: the above is written as general guidance and does not constitute professional tax or legal advice.