When I was a full-time employee, I clearly recall grumbling that my employer withheld taxes. Today though, I realize how beneficial it was to have those tax procedures automatically done for me, since the task takes precious time and mental energy. Plus, now I understand that someone was paying a hearty portion of the bill. Funny how things change when you strike out on your own.
I’d love to say that’s where my financial follies ended. But here’s what happened once I launched and scaled my freelance business. With these tips, hopefully you can avoid my missteps.
Don’t Be Like Me
“Thirty-five hundred dollars?” I asked my accountant again. “Wait. That can’t be right. I kept meticulous records, and I claimed $11k in tax deductions. And you found even more business expenses for me to deduct? How on earth do I still owe so much?”
My tax guy shrugged. “You’re not the first freelancer who’s had this exact conversation with me,” he answered. Turns out, neglecting to pay quarterly estimated taxes can be as painful as all the greats had warned.
That was the old me. Today, I know how — and when — to file and pay estimated quarterly taxes. And you should, too.
Start With a Plan
Begin with a smart strategy. Mark these dates on your calendar for the next few years (yes, years):
These are the federal government’s general due dates for self-employment taxes. Knowing them is the first step toward compliance.
Next, if your income is relatively steady, do a quick calculation to compute your estimated quarterly taxes. The formula couldn’t be easier:
This basic recipe is what saved my sanity just a few months into my first years of compliance.
Next, bookmark this article on paying quarterly taxes from veteran freelancer Angela Tague. In her super useful guide, Angela encourages readers to get familiar with the IRS’s Form 1040-ES. On page five of the form, you’ll find a how-to for calculating what should go on each line of the worksheet.
The Problem With the Tax Process
Often, the process varies wildly from one freelancer to another. In fact, the word “if” appears 73 times on the 1040-ES document to account for the different types of freelancers and their individual situations.
Angela brings up a good point about your tax bracket: Higher earners will pay more. And if you’ve recently been married or become the new primary breadwinner of your home, that’ll change your estimate, too.
Another common scenario: As a freelancer, you may think you’re in one bracket, but at any moment you can land (or lose) an “anchor” client — one that supplies 25 percent of your income or more. Or, let’s say you plan to take three months off to see the world. What then? Surely you don’t still pay the same 25(ish) percent of your annual income. Good question. You’ll be glad to know you can still calculate what you owe.
Considering the vast number of possible factors — some within your control and others decidedly not — I recommend that you take advantage of the many interactive online financial tools available to freelancers. One especially helpful tool is the self-employment income tax calculator over at The Motley Fool:
What makes this tool powerful is its combination of simplicity — three inputs instead of the 73 “ifs” we saw earlier — and comprehensiveness. It includes a field for employer income, which applies to moonlighting and side-gig freelancers whose bosses have already paid the employer portion of their income tax.
Other helpful calculators include the TurboTax business expenses slider by Intuit. Simply drag and drop your estimated business expenses and adjust the deduction percentage to see how quickly your deductions can add up to ease your burden.
And finally, if you’re ever in a tough situation — say you become disabled or experience substantial hardship in your business — a method of reducing your penalty for taxes owed may be available. I’m referring to the often misunderstood Annualized Income Installment Method, of course, and it’s worth talking with your own tax professional about this method (if the need should arise).
Once you’ve got your quarterly estimation, the rest is cake. Simply log on to the EFTPS (Electronic Federal Tax Payment System) and submit your estimated payment along with your completed 1040-ES. At this point, my favorite interactive financial tool is the IRS2Go mobile app, where you can get on-demand tax help and submit your estimated payment.
When I finally quit grumbling, I was able to take charge and become an expert in my own tax procedures. Now I can view quarterly tax time as a rhythmic financial check-in for the business. With all the benefits I’ve experienced, I encourage every freelancer to learn the ins and outs of this insightful ritual.