Regardless of the type of freelance work you do, you are required to pay taxes on a quarterly basis. Why? Because your employer is not removing those taxes automatically from each payment. Rather it is your sole responsibility to calculate your quarterly tax amount and make timely payments. But understanding how much and when often bring about stress and tend to steal time away from your work. In the following paragraphs, I will discuss the appropriate method for calculating your quarterly taxes, the terminology involved with that process, and ultimately how to submit those quarterly tax payments once they’ve been properly calculated.
Most importantly, let’s determine if you do indeed have to pay quarterly taxes. According to the IRS, all income earned through a taxpayer’s business, as an independent contractor or from informal side jobs is self-employment income, which is fully taxable and must be reported on Form 1040. However, you don’t have to pay estimated tax for the current year if you meet all three of the following conditions:
- You had no tax liability for the prior year
- You were a U.S. citizen or resident for the whole year
- Your prior tax year covered a 12-month period
This should clear up any misconceptions – any money earned through freelancing or side gigs you must pay taxes on unless you meet all three conditions as described. But more likely than not, you are in the vast majority of freelancers and must pay taxes. And the best way to lessen the burden of these taxes is to pay quarterly taxes.
Before diving into the details of calculating those quarterly tax payments, let’s review the common IRS terms that you will need to know in order to successfully make the calculation. First and foremost, your adjusted gross income or taxable income is the amount of money you earned freelancing minus any deductions, such as medical expenses, unreimbursed business expenses, etc. Secondly, there are five filing statuses that are necessary to understand before calculating your quarterly taxes. Those five filing statuses include single, married filing jointly, married filing separately, head of household, and qualifying widower with dependent child(s). Here’s a quick breakdown of those filing statuses in more detail:
- Single: Your filing status is single if you are considered unmarried and you do not qualify for another filing status.
- Married Filing Jointly: You can choose married filing jointly as your filing status if you are considered married and both you and your spouse agree to file a joint return. On a joint return, you and your spouse report your combined income and deduct your combined allowable expenses. You can file a joint return even if one of you had no income or deductions.
- Married Filing Separately: You can choose married filing separately as your filing status if you are married. This filing status may benefit you if you want to be responsible only for your own tax or if it results in less tax than filing a joint return. If you and your spouse do not agree to file a joint return, you must use this filing status unless you qualify for head of household status.
- Head of Household: You may be able to file as head of household if you meet all the following requirements:
- You are unmarried or “considered unmarried” on the last day of the year.
- You paid more than half the cost of keeping up a home for the year.
- A qualifying person lived with you in the home for more than half the year (except for temporary absences, such as school). However, if the qualifying person is your dependent parent, he or she doesn’t have to live with you.
- Qualifying Widow(er) With Dependent Child: If your spouse died in 2015, you can use married filing jointly as your filing status for 2015 if you otherwise qualify to use that status. The year of death is the last year for which you can file jointly with your deceased spouse.
For more details and special rules on filing statuses, please visit the IRS website.
With the varying filing statuses clarified, it is rather important to reiterate that you only pay taxes on your business earnings minus your business expenses, which results in what is referred to as your business profit. Therefore, it is critical that you are also keeping track of all your business expenses (AND CO can help with that!). These business expenses include everything that the IRS defines as an ordinary expense and a necessary expense. Here’s a deeper look into each expense:
- An ordinary expense is one that is common and accepted in your trade or business.
- A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
Beyond that of ordinary and necessary expenses, the IRS also considers cost of goods sold, use of home, use of car, subcontractor pay, retirement savings, rent, and insurance as tax deductible. Keep in mind that the ordinary and necessary rule applies to these expenses as well. But most importantly you’re incurring these expenses anyway – best to make sure you are writing them off and keeping your money! Make sure it all factors into your tax calculations!
As mentioned above, the easiest and best way to lessen your tax burden as a freelancer is to file your quarterly taxes. And naturally, you want to make sure you are saving as much money as deemed lawfully appropriate. In order to begin calculating your quarterly taxes, you must start by estimating your adjusted gross income and deductions for the year. Refer to the definitions above if you are uncertain about what qualifies as your adjusted gross income or as tax deductible. Then identify your tax filing status according to the filing statuses mentioned earlier. Pick the filing status that results in the least amount of money owed. After having determined your filing status as well as your adjusted gross income and your deductions, you are officially ready to do some tax calculations! Head on over to AND CO’s quarterly tax calculator and type in all your information. Within a few clicks, you’ll have your quarterly taxes calculated!
Now with your quarterly tax calculated and in hand, you are ready to start circling those calendar dates for when you should deliver payment to the IRS. Check out the graph below for this year’s quarterly tax payment deadlines:
With the actual dates of the quarterly taxes determined, let’s quickly review the steps to take in order to deliver payment. Simply visit the IRS Payments Gateway to pay your quarterly taxes online (AND CO can also remind you!)! Alternately, you may do one of the following:
- Mail your payment with payment voucher, Form 1040-ES
- Pay by phone or online (refer to Form 1040-ES instructions, pg 3)
As a best practice, make certain that your quarterly taxes are calculated accurately and match the payments you made in the year prior. And here are answers to the most frequently asked questions regarding quarterly taxes:
- You may have to pay a penalty for underpayment of estimated tax if you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments.
- You may be able to avoid or lower a penalty by annualizing your income and making unequal payments if your income is received unevenly during the year.
- You want to estimate your income as accurately as you can to avoid penalties.
- You can pay your estimated taxes weekly, bi-weekly, monthly, etc. as long as you’ve paid enough by the end of the quarter.
Overall, it is in your best interest to pay quarterly taxes by the dates listed. And by doing so, you’ll save yourself money, time, and aggravation. To calculate you quarterly taxes click here or set aside 25 to 30 percent of every paycheck in a business savings account to make sure you ready to deliver the full amount of tax calculated for your quarterly taxes. While tax calculating may not be a blast, the thoughtful preparation, careful record keeping of expenses, and keen awareness about the consequences will surely eliminate the stressors on your business and allow you to pave a path to freelancing success!