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Understand how to pay quarterly taxes as a freelancer, the penalty for not paying taxes quarterly, and how to get rid of that quarterly tax voucher
Maybe you went from working as a freelancer in your spare moments to making it your full-time gig, or you’ve finally landed your first big client. First off, congratulations! Take a moment to enjoy the success you’re having. However, with the new opportunity of growing your own business also comes managing the administrative side of running the business. These admin tasks tend to fall by the wayside more easily. If you’ve started to reach new levels of solo success, it’s probably time to start thinking about paying quarterly taxes, also known as estimated tax payments, to the IRS. So, how do you pay quarterly taxes as a freelancer, and what should you do to avoid penalties?
As a rule of thumb, if you expect to owe more than $1,000 in self-employed taxes for the year, you should be making quarterly payments. Your earnings and deductions will both factor into what you owe for taxes, but generally, you can expect to pay quarterly taxes once you’re earning $5,000 and up as a freelancer. Mind you, this doesn’t take into account expenses, deductions, or other forms of income. It’s not uncommon for estimated tax payments to creep up as your side hustle turns into more regular, reliable projects.
Instead of paying your taxes at the end of the year, if you are self-employed, the IRS expects that you will be making regular estimated payments throughout the year based on what you expect to be making. When you make estimated quarterly payments, you’re paying what you estimate you’ll owe in both income tax and self-employment tax. If you earn $400 or more net income from one client, you are considered self-employed and will need to file taxes as a business owner and pay self-employment tax.
Self-employment tax includes Social Security and Medicare taxes for both the side you may be used to paying as a W-2 employee, as well as the side an employer would normally pay. So, while it can feel like double, you’re responsible for the dual role you hold as a freelancer of both employer and employee.
Before we go too far, if you’re breaking out in a cold sweat because you haven’t paid quarterly taxes already and you think you should, we want to reassure you. You’re not going to jail! Plus, getting set up to pay quarterly taxes isn’t as scary as you think, even if you should have been doing it already.
Generally, if you haven’t been paying quarterly taxes, but have the tax liability that makes you eligible to pay them, you will incur some penalties, especially if you owe more than $1,000 in taxes. The IRS details penalties and how to figure out what you owe above your liability, but to put it plainly, what you owe will depend on how much you underpaid, when you underpaid, and the number of days that have passed since quarterly taxes for that period were due.
If you’re not requesting a waiver or other conditions haven’t been met alongside the penalty, you can have the IRS calculate what you owe for you and send you a bill. You can also go through the worksheet and calculate it yourself. For the most part, you’d take the amount you underpaid in a given quarter, look at the number of days since the due date, and multiply by 0.03 to calculate your penalty.
While penalties aren’t the scariest thing, they can add up. The IRS will back-calculate how much they think you should have paid every quarter and charge you monthly interest on top of the difference between what they thought you should pay and what you actually paid. In this way, keeping on top of what you think you owe will help you avoid this penalty in the future.
Now that you’re not in full panic mode, let’s talk about what you can do moving forward to ensure you are setting aside enough for quarterly taxes. Put your best foot forward by regularly documenting your income and expenses. Using a bookkeeping tool, such as QuickBooks, or an Excel spreadsheet at the least, is a good way to know what’s coming in and going out. This will help you make better estimates. Declare all the income you make, including cash payments and clients who don’t give you a 1099-MISC if you earn under $600 with them.
We should mention that there is a safe harbor rule against penalties. The IRS understands that freelance work can be unpredictable. What you make in one year might not look anything like the following year. However, if you pay 100% of last year's taxes in the current year, generally divided by 4, paying that every quarter will keep you protected from penalty. If you expect to be making less this year, as long as you are paying 90% of what you expect to owe in taxes by the end of the year, you will also be covered. The exception to this rule is if you are making over $150,000 per year. You will then owe 110% to avoid penalties.
Once you know what your income and expenses are, you can use a freelance tax calculator to determine your tax bracket, the expenses you can deduct, and, depending on your state, how much you should be paying per quarter.
While you will be making federal estimated tax payments every quarter, not every state requires quarterly payments. On the other side of the coin, some states expect you to pay different percentages in different quarters. While New York expects you to pay in equal quarterly installments, with the option of paying 100% upfront, California expects businesses to pay 30% of estimated taxes in the first quarter, 40% in the second quarter, 0% in the third quarter, and 30% in the fourth quarter. Go to your state’s department of revenue website for more information.
Depending on whether you’re figuring out quarterly taxes yourself, or working with an accountant, a couple things may happen. Your accountant, based on last year’s taxes, might send you vouchers that break up your estimated payments by quarter. Generally, they’ll base these off of what you owed in the previous year - at 100% for under $150,000 and 110% above that. The vouchers can help you remember what to pay and when, but know that you don’t have to stick to the amount on them if you know you will owe more this year.
For 2022, the dates for paying estimated taxes through the end of the year are September 15 for third-quarter and January 17, 2023 for fourth-quarter payments. In 2023 and beyond, you can expect the due dates on a federal level to be around April 15, June 15, September 15, and January 15 of the following year. They won’t be due on weekends, so you’d have until the following Monday to file if they fall that way.
While you can pay quarterly taxes directly to the IRS and your state’s website, Ruby Money can also help you make payments directly!
Being a freelancer includes a lot of freedom and opportunity to take on new and exciting projects, but it’s also important to remember the responsibilities that come with that freedom. Paying your estimated taxes can help you stay in the good graces of the IRS and help you have a better idea of your finances on a regular basis.
The last thing we want is for you to get to the end of the year and have a big tax payment as an unpleasant surprise. Planning all along the way is essential to keeping surprises at bay. It isn’t magic - it’s just math and good preparation! Setting aside what you need to pay after every paid invoice means that you don’t have to worry when quarterly taxes come around.
That’s why we’ve made it easy to help freelancers and solopreneurs allocate money automatically to taxes and retirement, making quarterly payments and check-ins a breeze. If you prepare enough, you may even wind up with a surprise that’s actually pleasant!
One of our Ruby Money customers, who sets aside her money from every payment that comes in, found out that she saved more than she needed. When it was time to make her quarterly payment in June, she ended up having extra left over that she was then able to allocate to retirement and use to cover some other expenses. Wouldn’t you rather get that kind of surprise than the alternative?
Start taking control of your quarterly taxes by using our calculator and scheduling a 1:1 session with us to demo Ruby Money. We’ll help you make estimated tax payments go from a painful activity to one that takes no effort at all.