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Transitioning to self-employment and a full-time freelance workload has been liberating. No more rushed mornings or pushing through crowds on the AM commute. I leisurely roll out of bed, brew my coffee, and sit down at my desk- slowly waking up as I browse through the top stories of the day.
As much as I love the perks of working on my own terms, self-employment doesn’t come without its own set of headaches. Not only am I responsible for the projects I’ve been hired to complete, I’m also my own support system – marketing, HR, and accounting all rolled into one. That means keeping track of folders full of contracts, updating spreadsheets with invoices and payments, and of course, taking care of my own tax liability.
Employee vs. Independent Contractor
Employees have the luxury of having their taxes automatically withheld from their paychecks. As sad as it is to see $1,000 gross dwindle down to around $700 in take home pay, at least it’s done. As long as all of your income comes from W2 work, you’re pretty much free from having to stress over your taxes – beyond filing your return each year.
As an independent contractor or someone who is self-employed however, you don’t have the luxury of that same kind of hands-off, once a year approach. As great as it is to bill someone for a $1,000 and actually get the full $1,000, it’s kind of a tease. You’re still responsible for paying taxes on that income, but you’re the one who has to set it aside and make the requisite contributions. This is what’s called Estimated Taxes, and it is due each quarter.
Do You Owe Estimated Taxes?
Even if you get paid a consistent, regular income, if you are not an employee (and if you didn’t fill out a W-4, you’re probably not), you must take responsibility for your own tax payments. If you’re working under a 1099-MISC, if you get cash from one-time gigs like babysitting, if you side hustle online, if you get prize money from a game show, if you receive investment gains- pretty much any income that doesn’t already have taxes taken out becomes part of your quarterly estimated tax responsibility.
If you owe more than $1,000 and fail to file quarterly, the IRS can hit you with penalties and interest. Waiting to cover your annual tax liability in one lump sum can also present other challenges, like not having enough to cover your total amount owed. Know what your quarterly responsibilities are and stay on top of them to avoid a real IRS headache.
Quarterly Tax Deadlines
For income received January 1st through March 31st, estimated tax is due April 15th.
For income received April 1st through May 31st, estimated tax is due June 15th.
For income received June 1st through August 31st, estimated tax is due September 15th.
For income received September 1st through December 31st, estimated tax is due January 15th.
How Much Should You Pay?
Calculating your quarterly estimated taxes means figuring out your expected adjusted gross income, taxable income, deductions, and credits for the year. The more organized you are, the easier this will be. Keeping separate spreadsheets, even separate accounts and credit cards for all business and freelance income and expenses can simplify the process when it comes time to file.
Form 1040-ES. The Form 1040-ES, used to pay estimated taxes, can also help in calculating your quarterly estimated payments. The form includes a worksheet to give you a clear picture of how much you owe.
Use Historical Reference Points. If you’ve been running your own business for a while, you can also reference your tax returns from previous years to estimate projected income and deductions for the current year and your respective tax liability.
What Forms Do You Need?
Unfortunately, paying your quarterly estimated taxes isn’t as simple as a few clicks on Venmo or a swipe of your credit card. You’ll need to send in a Form 1040-ES, which includes quarterly payment vouchers to accompany your payment. In addition to estimated federal taxes, you’ll also need to pay your quarterly estimated state income taxes, getting the appropriate forms from your states’ tax office.
Storing Your Temporary Savings
Once you get a handle on the basics- filing deadlines, forms needed, and organizational systems to help you streamline the process – the biggest challenge in self – employment taxes becomes separating and saving your quarterly payments.
It’s far too easy to dip into what should be your designated tax payment if you leave all your earnings sitting in a checking account. Set up a system of transferring a portion of each paycheck into a high yield, no fee savings account. That way the money is accessible when you need it come quarterly tax time, but not so accessible that you spend it all before fulfilling your tax liability.
Check out MagnifyMoney’s savings account comparison tool to find an account with solid returns and low/no fees, maximizing your money for every penny it’s worth before turning over whatever you owe to Uncle Sam.