After my first year of freelancing, I was on top of the world. I made an appointment for my annual tax preparation with a group of retired accountants who kept up their licensing and worked a few weeks each year for fun. I walked in and was introduced to a retiree sporting a gray ponytail and a rock ‘n’ roll T-shirt. Perfect — this is my kind of guy. Unfortunately, our conversation about music quickly went off-key.
Man, you didn’t pay any self-employment taxes last year? You’re going to owe a bunch, and get a $200 tax penalty on top of that. I’m sorry, lady. Then I wrote a check to the IRS and another to the accountant as I tumbled from the top of my proverbial perch.
I’m not the only one whose first year of freelancing ended with an unexpected fizzle in excitement. As USA Today reports, there has been a 32.8 percent jump in the number of tax payment penalties levied from 2007 to 2016, according to data from the Internal Revenue Service (IRS). Many industry experts believe the shift could be due to the increase in self-employed workers — who are simply unaware of their tax liabilities. In 2016 alone, a whopping 9.92 billion penalties were levied. Ouch! If you’re a new freelancer or just need a quick refresher, here’s how to avoid the tax penalty in your own business.
Let’s Do This Thing (Correctly)
I don’t want you to become a statistic. There’s a super simple way to avoid a tax penalty, and that’s by paying your self-employment taxes on a quarterly cycle. The IRS makes it easy: You can pay with a check and a completed 1040-ES form (which you can get from your accountant or download online), or you can use the Electronic Federal Tax Payment System (EFTPS) website like I do. I’ve connected my business checking account to the website, and it takes just a few minutes to initiate a transfer.
If you’re not sure how to save for these taxes or calculate how much you owe, check out the chart on page 7 of the 1040-ES form. It’ll show you how much you owe in taxes that year, which can help you determine how much to save on a monthly basis. Then, browse these articles for some real-world guidance from fellow freelancers and myself:
It’s April … Is It Too Late?
So, your tax prep appointment is tomorrow and you haven’t made any payments over the past year. If it’s before April 15, you can ask for a filing extension. It’s important to note, however, that there’s no extension available for paying your taxes, and interest on payments accrues daily. If you’ve missed your payments all year, the best advice I can give you is to pay what you can now through the EFTPS or a state government electronic payment page, such as this one.
But if it’s after April 15, you’ll most likely be facing the estimated tax penalty unless you meet one of three criteria. According to the IRS website, “Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90 percent of the tax for the current year or 100 percent of the tax shown on the return for the prior year, whichever is smaller.” When in doubt, talk with your tax professional for guidance. They know the current laws and how to get you on the right path.
To avoid anymore tax-paying missteps during my freelance career, I’ve added quarterly reminders to my work calendar and accounting program. If you want to take a more automated route, you could use a tax assistant app that helps you save and send in your self-employment tax payments. By finding the right method that works for you — and sticking to it — you’ll always be able to avoid the tax penalty.