Paying Your Estimated Taxes
When working for yourself, one of the first hurdles you face is figuring out how to pay taxes on the money you earn. Thankfully, with a little context, you can easily determine what you owe and how to pay it.
Getting paid in full
After completing a freelance project, you’ll notice something different about the payment you receive: you’re paid every cent of what you invoiced. Huh? Shouldn’t money be taken out for income tax and all that? It turns out that yes, in fact, it should, and that’s where estimated taxes come in.
Why not just pay annually?
This would make life easier, but that’s not how government works. Uncle Sam wants his cut on the regular to keep programs like Social Security and Medicare funded. Failing to pay quarterly results in a financial penalty (i.e., less money in your pocket) when filing your annual taxes. Quarterly it is!
Part I: Making your federal quarterly tax payments
For the self-employed sole proprietors of the world (that’s you, freelancer) it all comes down to the 1040-ES. Give it a look over to familiarize yourself with each section, then follow these steps:
- Gather your tax return from last year to use as a benchmark once you calculate your estimated taxes in step 3. If you worked a full-time job earlier this year, you’ll also need a copy of your last pay stub so you know what you earned and how much has already been taken out for taxes.
- Determine your self-employment tax. Estimate the money you will make from self-employment this year, then follow the steps in the 1040-ES self-employment tax worksheet. Note that there’s a $118,500 limit here. For example, if you made $60,000 from freelancing (line 1a) and another $60,000 from a full-time job (line 6), $1,500 of that would not be subject to self-employment tax.
- Calculate your estimated tax using the worksheet included in 1040-ES. The key word with this whole process is estimated. Once you have an estimate of your annual income, you can use the worksheet and the information from steps 1 and 2 to calculate your quarterly payments. Keep in mind the goal is not to determine the actual taxes you owe, but to pay close to what you will owe. If you pay at least 90% of what you will owe or 100% of what you owed last year then you’ll avoid any underpayment penalties (though for those who made more than $150,000 last year, it’s actually 110%).
- Make your payments. Included in the 1040-ES are four vouchers, one for each quarterly payment, which must be mailed by the 15th of April, June, September, and the following year’s January. If the 15th falls on a weekend or holiday then the due date is the next business day. You can also file your federal quarterly payments online.
- Keep a record of what you paid and when. Again, you can use a worksheet provided in the 1040-ES for this. Make sure to keep it in a safe place, as you’ll need this information when filing your annual taxes.
Part II: Making your state quarterly tax payments
If your state has income tax then it’ll want a piece of the action too. You can start here to determine your state’s estimated tax process. Your state quarterly payments are due at the same times as your federal payments.
Another option
If you freelance in addition to working a full-time job, you can choose to take taxes out of your earnings instead of paying quarterly estimated taxes. Just file a W-4 with your employer, and make sure the amount taken out is enough to also cover your freelance income.
This is one freelancer’s approach to estimated taxes. For advice on your specific needs, speak with to a certified accountant or tax advisor.
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