One of the most painful things about becoming a freelancer is realizing how much of your income gets eaten up by taxes. Here’s what you need to know about estimated quarterly taxes to make the process as painless as it can be.
Freelancers have to pay taxes as both employer and employee, which can mean as much as 30 percent of each paycheck goes to tax payments. However, to make things even more difficult, freelancers need to pay taxes once every three months, not once a year. Learning to budget for and calculate your estimated quarterly taxes can have a steep learning curve.
Whether you’re a beginning freelancer or an experienced one, you might find yourself facing questions when those quarterly payments come due. We talked to some tax experts to clear up those questions for you—here’s what you need to know.
What Are Estimated Quarterly Taxes?
As a freelancer, you don’t have an employer to withhold money for taxes from your paycheck. Estimated quarterly taxes help take the place of that regular tax withholding.
Why are freelance taxes so high? Because of the self-employment tax, which covers Social Security and Medicare taxes. “If you were to work for a company, the company pays half of that figure, but if you are running your own business you pay both the employee’s portion and the employer’s portion of the taxes,” notes Mike Scott, who reviews tax returns at Independent Bank.
Parting with 20 to 30 percent of your income every quarter can be hard. Although you can ignore your taxes until April 15th nears, that’s definitely not what experts recommend.
“Develop the discipline to put a portion of the gross income aside for taxes, and making the quarterly tax payments will avoid the year-end surprises,” says CPA Michael Law. If you wait until the end of the year, not only will your tax bill be higher, but you’ll also face a financial penalty for not making your quarterly payments on time.
How to Pay Estimated Quarterly Taxes
You can easily make your estimated quarterly payments online through the IRS website (you can also pay by phone or mail if you prefer). They’re due on the 15th of January, April, June, and September each year. The January payment covers the last quarter of the previous year.
Learning where and when to pay is fairly easy, but determining how much to pay poses more of a challenge. “The easiest way to plan for your quarterly estimated taxes each quarter is to save 20 to 30 percent of your revenue or profit as it comes into your bank account,” says financial strategist Clarissa Wilson.
She recommends saving either 20 percent of your total revenue (what you get paid before deducting your expenses), or 30 percent of your total profit (what you have left after deducting expenses). Each time you get paid, or once every week, you can transfer your tax money to a savings account specifically for that purpose.
Getting Help with Your Quarterly Taxes
You’ll need to keep careful records of how much you get paid and all of your business expenses, so you can accurately calculate how much you owe each quarter. It’s usually easier to use an app than to do this by hand (we like QuickBooks Self-Employed, but other software also does the same thing).
However, hiring tax preparation help is not a bad idea if you’re worried about making your tax payments accurately. This can be costly up front, but it’s better than facing an IRS penalty (or worse, an audit).
Don’t be scared of your freelance taxes: Millions of people pay them each year. If they can figure it out, so can you! Careful budgeting and record-keeping make it possible—and these tips will help.
Looking for smart budgeting advice? Check out how you can save more money without making big changes next.