Being a freelancer has its perks—the freedom to work from anywhere, choosing your clients and being able to be in total control of how your business is built. Still, one of the not so amazing parts of being a freelancer is that dreaded ‘T’ word.
Tax season usually rolls around every April. When you’re an independent contractor or freelancer though, estimated taxes come into play. Even if you have a full-time job, but make money on the side, estimated taxes still apply to you.
Since there’s no tax automatically withheld from your income, filing estimated taxes can actually help you in the long run. How so? Let’s break it all down through FOUR facts you may not know about estimated taxes.
What Exactly Are Estimated Taxes?
The first fact involves what estimated taxes actually are. Put simply estimated taxes are an alternative to making one tax payment in April. Since your taxes aren’t automatically withheld from your income, they make it easier to calculate and handle your tax burden.
Estimated taxes are paid every quarter, however, they don’t follow the same rules as what we’re used to. For example, in 2019 quarterly tax payments are due: April 15, June 17, September 16 and January 15th. Therefore, planning ahead is key to paying on time.
As an added plus, if you file your 2019 tax return in January, you don’t have to make the mid-January estimated tax return payment. Now that we’ve got that covered, let’s take a look at the next fact about estimated taxes.
How Are Estimated Taxes Calculated?
There’s more than one way to calculate your estimated taxes. However, there are two common methods that most self-employed people use, and these are the two methods that I recommend.
The first method involves estimating the amount you think you’ll owe for the entire financial year and pay a quarter of it the IRS each quarter. For example, if you think you’ll end up paying $12,000 in taxes for 2019, you’d pay $3,000 each quarter. If you make a consistent amount of income each year and are good at predicting what each year will be like financially, then this method might just be the best way.
The second method involves estimating your annual tax liability using what you’ve already made during the year. If your income varies, this is the route you ought to take. The IRS has a worksheet to help you annualize your tax at the end of each quarter based on a reasonable estimate of your tax liability so far.
Clearly, filing estimated taxes is much easier than it sounds. Let’s move on to the next fact about estimated taxes.
How Exactly Can You Pay Your Estimated Taxes?
Just like your annual tax liability, you can pay your estimated taxes with a check or electronically. The form that you use to file your estimated taxes—Form 1040-ES—comes with a payment voucher that you can mail with a paper check.
In addition, the IRS’ Direct Pay System and the U.S. Treasury’s Electronic Federal Tax Payment System let you pay FREE directly from your bank account, or for a 2% fee with your credit card.
As a bonus, if you find an IRS retail partner you can even pay with cash.
What Happens If I Don’t Pay My Estimated Taxes?
Well, in true IRS style, if you don’t pay your taxes you’ll probably get charged a penalty for late or inadequate payments—even if you’re due a refund when you file.
The only way you can get a break on penalties if you experienced some extenuating circumstances, or you’re at least 62, retired, or disabled; or you underpaid because of reasonable cause and not intentionally.
Now that we’ve covered these four facts about estimated taxes you’re in a better position now than when you started reading! Let me know in the comments what you think.