When you become a business of one, you still have to share your income with good old Uncle Sam. Yep, it’s time for paying quarterly self-employment taxes — or, as I like to explain it to others, the time of year when hard-working entrepreneurs donate a chunk of their income to fund state and federal programs like Social Security and Medicare. For 2017, the quarterly self-employment tax payment due dates are April 18, June 15, September 15 and January 16, 2018. Yes, that means the third-quarter payment is just around the corner.
The United States Internal Revenue Service (IRS) has a fabulous resource to guide indys called the “Self-Employed Individuals Tax Center.” If you haven’t scoped out this website yet, bookmark it. I guarantee you’ll peek at it for helpful reminders when paying quarterly self-employment taxes.
When you’re first starting out as a freelancer, it can be hard to find the right information about quarterly taxes. That’s why I’ve compiled these three easy steps you can take to prepare for your first self-employed tax payments.
1. Understand Your Tax Bracket
As a self-employed individual, you no longer have an employer processing payroll, automatically deducting your various tax obligations and, most importantly, sharing a portion of the tax burden. It’s all on you now — but it’s not nearly as scary as it sounds.
First, you need to calculate how much you owe in self-employment taxes. If your net earnings for the year will reach $400 or more, it’s time to get familiar with form 1040-ES (Estimated Tax for Individuals). It’s a simple worksheet where you’ll enter your income and expenses, then calculate how much you need to pay the government.
The more you earn, the higher percentage of your income you’ll need to pay in. Pay close attention to the charts on page seven of the 1040-ES to learn where you fall within the 10 to 36.9 percent tax brackets. Remember: As your business and profits grow, so will your tax contributions.
2. Save for Quarterly Tax Payments
When it comes to managing the financial end of my business, I’ve taken a cue from past employers. I process payroll every two weeks and allocate funds to a separate account to take care of my tax liabilities as a self-employed individual.
In addition to a business checking account, where payments flow in and payroll flows out, I also have a business savings account that’s a dedicated holding tank for my quarterly self-employment tax payments.
For example, if I’ve taken in $2,000 in payments over the past two weeks, I’ll shift approximately 25 percent — or $500 — to that special savings account where it’ll sit until I pay my quarterly self-employment taxes to the state of Iowa and the federal government.
3. Make Your Self-Employment Tax Payments
As an indy, you’re expected to pay the federal government estimated self-employment taxes four times per year. Large businesses pay monthly, but most newbies aren’t in that category—yet.
In preparation for the September 15 deadline in a few days, I’ll log onto the Electronic Federal Tax Payment System (EFTPS) website and digitally submit my 1040-ES, along with the tax money I’ve set aside since my last quarterly payment. For those who don’t care to transfer funds online, there are mail-in payment vouchers attached to the 1040-ES that you can print and mail with a check.
Some states also require self-employed individuals to make estimated income tax payments if they exceed an annual tax liability threshold. In Iowa, the amount is $200. I simply go online and use the Iowa Department of Revenue’s E-File & Pay system to take care of my payments on the last day of April, June, September and January of the following year.
If you missed the September deadline, fear not: You can file for an extension. It’s not that big of a deal, as long as you don’t ask for leeway every time you’re paying quarterly self-employment taxes. Feeling overwhelmed? If you find you need a little help figuring out the amount you owe, putting it aside so you don’t spend it and knowing when to send the payment off, look into a financial planning app for freelancers like SetAside. The team’s still working on this service, but you can sign up to be one of the first to use it. Now, get back to work!