Taxes are complicated for just about anyone. But, for contracted workers, freelancers, and self-employed individuals, filing quarterly taxes can be downright nightmarish. While it helps that income taxes are changing, and the standard deduction is increasing for 2018, there are still multiple hurdles to filing and paying taxes each year.
If you or your accountant realize you might need to start making quarterly payments, also known as “estimated payments”, on your taxes due to income not being withheld, then here are a few crucial things to know beforehand.
Filing Quarterly Taxes as a Freelancer
Do you Have to Submit Quarterly Payments?
To determine whether you need to pay estimated taxes quarterly to the IRS, Publication 505–specifically, Figure 2-A on page 22–can help you figure out your current tax situation. In most cases, you don’t have to pay estimated taxes if you anticipate owing less than $1,000.
If you believe you’ll owe more than this amount, then it comes down to whether your income tax withholding and refundable credit amounts are 90% or 100% of the tax shown on your tax return.
The IRS Publication 505 also provides several example scenarios to help you determine if you need to pay estimated quarterly taxes or if you’re fine waiting until the next tax-filing season to pay one lump sum. Generally speaking, if you’re self-employed or a freelancer who does not expect to have much of their income withheld for tax purposes, then you most likely need to look into quarterly payments to avoid penalties in the future.
Form 1040-ES
This IRS document is designed to help taxpayers determine how much they should pay regarding quarterly tax payments. With Form 1040-ES, you can calculate your self-employment tax and estimated taxes.
Don’t forget to account for the new credits and deductions available before paying your estimated taxes because you risk overpaying otherwise. Also, be sure to keep track of the date and amount of your estimated tax payments for record-keeping purposes.
How do I Pay, and How Much?
You can make quarterly payments online or through the mail. Quarterly due dates established by the IRS are typically in April, June, September, and January of the following year. You can either pay for your entire estimated tax burden upfront or pay in installments.
Since this operates on a quarterly system, you should divide your estimated annual income tax burden by four–so if you expect to pay $2,000 in taxes, you’ll be making $500 estimated tax payments by each due date.
Alternatively, individuals who make irregular incomes could utilize the annualized income installment method to cover their taxes. This is advantageous for taxpayers who do not have money to cover their taxes during certain periods due to little to no income. So, you only have to pay estimated taxes based on your current income levels rather than your annual projected income.
What Happens If you Miss a Payment?
If you miss a payment deadline or underpay, you could be subject to a penalty from the IRS. The penalty is subject to some exceptions and depends on various factors, including your income, estimated tax bill, the severity of the underpayment/lateness, and so on.
Generally, the penalty consists of 5% of the overall amount due for each month you’re late. The penalty is limited to 25% or less of the amount you owe. If you do not file within 60 days of the due date, a minimum penalty of $100 may be assessed.
You cannot simply put more money towards the next quarter’s estimated tax payment to make up for late or insufficient payment, so be sure to pay well before the deadline.
Recap: Pay Your Taxes on Time!
Tax season can be challenging for anyone, but determining your quarterly payment amounts and making those payments before each deadline can be even more difficult. Fortunately, IRS Publication 505 and Form 1040-ES are available to help you calculate tax returns now and the appropriate amounts in estimated taxes.
Despite the seemingly cumbersome process of paying taxes in advance, it can help you stay on top of your tax burden without racking up thousands of dollars in unexpected tax bills come next April.
It would be awful to dip into your emergency savings fund to cover a massive income tax bill. So, be sure to follow the IRS guidelines for estimated taxes to avoid unnecessary headaches and painful penalties in the future.