For freelancers, tax time can be hectic. You’ve got to gather all of your documents and prepare your return (or work with a professional who will prepare it for you). Sometimes, you even have to write a big check to the IRS. This is bad enough once a year, but for freelancers, tax time happens four times a year. Oh, you’re just finding that out now? Read on!
The U.S. has a “pay-as-you-go” tax system, so taxes must be paid as you earn or receive income. For employees, those payments are handled by withholding taxes from a paycheck. Freelancers have to manage tax payments themselves through quarterly estimated tax payments.
Whether you’re a new freelancer who’s just trying to figure this out or an experienced pro who needs a refresher, this guide will help you decide if you need to pay quarterly taxes and provide strategies for making estimated quarterly tax payments.
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So, Who Has to Pay Estimated Quarterly Taxes?
Individuals, including sole proprietors, partners, and S Corporation shareholders, generally have to make estimated quarterly tax payments if they expect to owe tax of $1,000 or more when their return is filed.
If you don’t pay enough tax, you may be charged a penalty. You may also be charged a penalty if your quarterly taxes are paid late, even if you are due a tax refund at year-end.
How Much Should I Pay in Quarterly Taxes?
Deciding how much you should pay is complicated because there’s no hard and fast rule for what you’ll owe. It depends on your tax bracket and other deductions and credits for which you might be eligible.
But remember, your estimated tax payments cover both income taxes and self-employment taxes. For 2023, self-employment taxes are 15.3% of your net self-employment income. So whatever your estimated income taxes are, add an additional 15.3% to cover self-employment tax.
If you’re new to freelancing, you’ll need to come up with an estimate. This can be difficult if your income fluctuates and you don’t know what you’ll earn. IRS Form 1040-ES can help walk you through the calculation to determine how much you should pay in quarterly taxes.
The more organized you are, the easier it is. Using accounting software can help you keep income and expenses organized and simplify the process of paying quarterly taxes.
Understanding the “Safe Harbor” Method
While estimating your tax liability can be complicated, the IRS allows you to use a “safe harbor” method. Use one of these methods, and the IRS will not impose an estimated tax penalty, even if you’re underpaid at year-end.
- 90% of the tax you owe for the current year. Estimate what you owe this year and pay at least 90% of this amount in four installments. That number may be hard to predict if this is your first year of freelancing or your income and deductions are irregular.
- 100% of last year’s taxes. If you’ve been freelancing for a while and your income is generally stable from year to year, you can pay 100% of the tax shown on your prior-year return as a safe harbor. Just take a look at Line 24 of your 2022 Form 1040. This is the total tax you owed last year before any estimated payments, withholding, or refundable credits were applied. Divide this amount by four and pay that quarterly. Note that if your adjusted gross income is greater than $150,000 (or greater than $75,000 if you are married but file separately from your spouse), the safe harbor is 110% of your prior year’s tax liability.
- Annualization income installment method. This is best for seasonal freelancers or people whose income rises dramatically late in the year. This method allows you to annualize your quarterly tax based on an estimate of income and deductions rather than paying in equal installments. For example, if your estimated taxes for the year is $20,000, but $15,000 of that comes from the last quarter of the year, you can use the annualized income installment method to pay as you go. To use this method, you’ll need to file Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, including Schedule AI, with your return.
Keep in mind, though, that if you expect your income to be significantly higher than last year, you may want to pay in more than the safe harbor amount. These methods will help you avoid underpayment penalties, while you could still end up owing a significant amount to the IRS at tax time.
Next Step: How to Plan for Quarterly Estimated Taxes
For many freelancers that pay estimated taxes, having the cash available to make the quarterly payments when they’re due can be a big challenge. Without a strategy, you can easily spend all of your cash paying a tax bill when you’d rather be reinvesting in your business. So once you’ve figured out how much you should pay for quarterly taxes, you need to select a method for setting those quarterly payments aside. Here are a couple of ways you can do that.
Make Monthly Transfers Into a Savings Account
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Let’s say you calculate your estimated tax payments for the year based on the safe harbor method and decide you need to pay $20,000 per year or $5,000 per quarter. That works out to $1,667 per month.
At the end of each month, you transfer $1,667 to your savings account, where it will sit until it’s time to pay your quarterly estimated tax payment. Set a reminder on your calendar to do this at the end of each month or automate the transfer through your bank. You can either park this money in your regular savings account or put it in a separate account that you never touch unless you’re paying taxes.
Alternatively, Transfer a Percentage of Each Payment Into Savings
If your income fluctuates from month to month, it might make more sense to transfer a portion of each payment you collect into savings. First, you’ll need to calculate your estimated taxes for the year, then figure out what percentage of your net taxable income that represents.
For example, let’s say your taxable income for the year will be approximately $100,000, and you estimate your tax liability, including income and self-employment taxes, to be $20,000. That’s 20% of your income. So each time you collect a payment from a client, you would transfer 20% of it into your savings account.
This strategy doesn’t take into account any expenses that might be used to offset your income tax. If you have a lot of expenses, this strategy might mean you overpay on income tax. However, you can have that overpayment applied to next year’s tax liability, which will reduce your quarterly estimated taxes next year.
Also, if you collect a large number of small payments each month, this method can be time-consuming. You may be able to save time by automating the process through your bank or a savings app.
When Are Estimated Tax Payments Due?
Quarterly taxes are generally due on April 15th, June 15th, September 15th, and January 15th of the following year. If one or more of those dates fall on a Saturday, Sunday, or legal holiday, the next business day is when you need to pay estimated taxes.
You can mail your quarterly taxes to the IRS using the vouchers included with Form 1040-ESor pay online using IRS Direct Pay.
Keep in mind that you may also need to pay quarterly taxes to your state and city, depending on where you live. Each jurisdiction has its own rates, forms, and sometimes different due dates. So, do some research with the Department of Revenue or work with your tax professional to ensure all your bases are covered.
Prioritizing quarterly estimated tax payments can be tricky when dealing with a variable income – especially if this is your first year freelancing. But diligently tracking your income and expenses and setting aside tax payments can take some of the bite out of tax time.
After the first year of paying quarterly taxes, you’ll have a better idea of your safe harbor tax payments and a system in place to make it all run smoothly.
This post was updated in November 2023.
