Paying quarterly taxes as a freelancer

Ok, so you’re a freelancer and you have a couple of clients. You might have even set up your own business. But what happens when tax time rolls around? Do you know what you need to do?  
 

As a freelancer, tax season can easily be one of the most stressful periods of the year. If you’re filing your taxes on your own, this can be difficult as there are so many identification numbers and forms to track down. 

Many freelancers understand that there are a variety of tax fees and dues to stay on top of but it can be hard to remain prepared throughout the year. If you're not, you might find yourself in trouble when it comes time to file your taxes. Filing your own tax return as a freelancer can seem complex at first. But it can be made a lot easier – especially if you already have the information to hand! 
 

With this guide, you will learn which taxes freelancers need to pay, how to calculate your quarterly tax payment, the dates of quarterly tax deadlines and the steps to paying your quarterly taxes. 

 

As a freelancer, you're essentially your own business. As such, you are required to pay both self-employment taxes and federal income taxes. 

Treating yourself as a business has some definite benefits. You can set up retirement accounts and write off related expenses. 

But you will be responsible for paying quarterly estimated tax payments, as well as paying any back taxes that may come due. The good news is that you can deduct your self-employment taxes from your income taxes so that your tax load is lighter. Make you calculate the right amounts for both to avoid an IRS audit. 
 

In the U.S., self-employment tax (also known as SE tax or SECA) is a social security and medicare tax you pay on your self-employment earnings if you are a sole proprietor, independent contractor or freelancer. This tax is similar to the social security and medicare taxes withheld from your paycheck if you are an employee. 

More than 15 million U.S. taxpayers were subject to self-employment tax in 2011, according to the Social Security Administration (SSA). 

The self-employment tax rate is 15.3 percent of your net self-employment income, up to an annual maximum of $106,800 for 2014. 

Self-employment income is any money you earn from running a business or profession as a sole proprietor or independent contractor. It does not include money you make as an employee -- that's covered by the employer's share of social security and medicare taxes. 

 

If you are self-employed, you must pay income tax on the profits that your business made. The amount of tax you pay depends upon how much profit you make, and what type of income it is. 

Treating your business like a hobby can result in penalties and fines if it fails to meet minimum requirements. 

The IRS defines a hobby as an activity that is done for pleasure, rather than profit. When the activity becomes more work than pleasure, and the time spent on it detracts from other pursuits, then you are now operating a business. 
 

The money that you make from running your business counts as taxable income. However, you may deduct any expenses incurred while conducting your business from this gross income to arrive at your net taxable income. 

All businesses are required to withhold and remit sales tax to their state, county and any other taxing jurisdiction. But depending on the type of business you have, you may also be required to make quarterly payments to your state. 

Research the requirements for your state as well as any local taxing authorities where you do business. Make sure you understand the difference between a quarterly payment and a withholding amount in order to avoid penalties. 

For example, some states require quarterly payments from businesses that don't make enough sales during a quarter to create a withholding amount of at least $100. Other states don't require a minimum withdrawal amount, but do require you to report your sales tax liability on a specific date. 

Losing money can be painful. But if you're a small business owner, you've probably figured out that it also means paying taxes on money you never earned. 
 

Trying to determine what your taxable income actually is can be an uphill battle, especially when you're just starting out. 
 

Your gross profit is the first place to look for your taxable income as a small business owner. If you're in a partnership or LLC, it's the amount reported on Schedule K-1 of Form 1065. If you are reporting on Schedule C, then it's the net income from line 31 of Form 1040. As a freelancer you can gather this information from invoices or 1099 forms.  

 
 

2. Determine your business expenses. 

These include all of the costs you incurred starting and running your business. Recordkeeping for small businesses is often informal. If you use your own personal accounting system, keep track of all your business expenses in a separate account. 

Tally up what you've spent on office supplies, telephone bills and travel expenses. You'll also want to include any other miscellaneous costs, such as mileage or meals while traveling for work. 

To get the maximum tax deduction, you can't deduct personal or living expenses like groceries or household bills such as rent payments. You should also find out if there are any industry-specific deductions available to you. For example, are there deductions related to the industry you're in? Does your city offer any incentives? These types of questions will help you save more money on taxes when filing next year's return. 

The IRS allows certain deductions that reduce your taxable income — such as expenses related to the production of your goods or services and some rental property expenses, including depreciation (but not interest). The resulting number is your adjusted gross profit, which is used in step 3. 

 

At this point, the next step is to use the 1040-ES form to figure out self-employment and income tax owed based on your taxable income. 

Once you have that number, you will divide the final tax amount owed by four and submit those four payments on a quarterly basis according to the estimated payments due dates. 

 
 

 

April 15, June 15, September 15 and January 15 are the regular due dates for quarterly estimated tax payments. You can also make annual payments if you prefer. 

The deadlines don't change if you're self-employed. Still, freelancers have the option of quarterly or annual estimated tax payments because they don't get the same benefit of withholding taxes from their paychecks that wage earners do. Freelancers must make sure they're paying their own income taxes on time to avoid a penalty fee. 

If you're self-employed, including as a freelancer or independent contractor, you must make estimated tax payments to the IRS so that you don't run afoul of the law and face an underpayment penalty fee. 

Making estimated tax payments is a way to keep Uncle Sam in check and avoid penalties for failing to pay sufficient taxes throughout the year. Those who fail to pay enough during tax season can owe money with interest at the end of the year. 

Non-wage earners, such as independent contractors and freelancers, must file Form 1040-ES in place of a Form 1040 each quarter with their payment due dates being April 15 (April 18th if 

 

The IRS offers several payment options, each with its own pros and cons. 

Here are some of the most common methods: 

Payments by check or money order. If you mail in your payments, the IRS recommends you send your checks and money orders with a traceable delivery service like certified mail. This is to protect against lost or stolen mail. 

Online payments. Those who prefer to pay electronically can use the Electronic Federal Tax Payment System, which accepts Visa, MasterCard, Discover Card, American Express and e-checks. 

Automatic debits from your bank account. The Electronic Funds Withdrawal system allows taxpayers to set up automatic debits from their bank accounts that directly bill the government on a specific day of the month. Many taxpayers find this convenient and useful because they don't have to remember to pay their taxes on time. 

Automatic bill payment service. You can also sign up for a tax payment service with a registered tax preparer or tax preparation software that will automatically pay your quarterly taxes through an ACH withdrawal from your bank account at no cost to you. 

The IRS recommends paying as much of your tax bill as possible with direct debit from a checking or savings account because it saves time and money versus mailing in a check or paying by cash or credit card at the post office. 

 

We hope this blog has helped a freelancer out there not lose their hair to tax headaches. We all have bills to pay and stories of the IRS knocking on our doors. 

Hopefully, these tips will help you be prepared for your quarterly taxes so you can enjoy a little peace of mind before your next project comes around!