Quarterly tax deadlines arrive four times a year like clockwork, but even for seasoned freelancers, remembering to pay the Tax Man quarterly (and having the cash available to do so) might be easier said than done.
For individuals who are new to freelancing or are considering quitting a salaried job to become self-employed, here is a quick primer: When you work for a company and receive paychecks, your employer deducts various taxes on your behalf, including federal income tax, payroll taxes that finance Social Security and Medicare, and, in some instances, state income taxes.
However, once you become self-employed, you are responsible for making those tax payments. And, because you are your employer, you must pay a bit more in “self-employment tax” to contribute to Social Security and Medicare (businesses pay some of these taxes on behalf of their employees).
In other words, even if your entire tax return is due only once a year, you must make tax payments as soon as you earn money — once a quarter. It’s known as a “pay as you earn” scheme.
Paying taxes will never be fun, but with a bit of forethought (and lowering your expectations), it doesn’t have to be utterly miserable.
1. Select the most straightforward method for calculating your payment amount.
The main reason to pay your quarterly due taxes is to avoid being penalized for underpayment. If you earn a lot of money but don’t pay any taxes until you file your annual return, the government will be irritated and tack on some more money to your ultimate tax bill in the form of a penalty.
To avoid the underpayment penalty, you have two options: make quarterly payments equal to 100% of your previous year’s tax bill (110 percent if you earn more than $150,000) or quarterly payments equivalent to 90% of your current year’s tax bill.
Of course, if you make significantly more money in 2021 than you did in 2020 (or have a larger tax bill for other reasons), you’ll still have to pay higher taxes when you file your annual tax return, but you won’t face a massive penalty.
It’s also worth noting that the penalty itself is relatively tiny: roughly 3% for a whole year, so the liability for underpaying by even $2,000 is often $100 or less.
While the penalty method is intricate, it is dependent on the amount you underpaid and the number of quarters you were late.
2. Automate Everything You Can
“Do all of your thinking once, and then schedule everything out, so you never have to think about it again,” Yi León advises. Her strategy is to calculate her payments and use Gmail’s “schedule send” option to send herself an email with the dollar amount and a link to the IRS payment site, with the email arriving in her inbox a few days before the payment is due.
If you prefer to use paper vouchers provided by a tax preparer, you may still complete some of the work ahead of time by addressing your envelopes to the IRS.
Place the envelopes somewhere prominent, so you don’t forget about them; you may even write the deadline on the envelope in a small font.
If you intend to pay a certain percentage of your income in estimated taxes, you can do so as well. Most big banks will only allow you to automate transfers of a specific dollar amount.
Still, Catch, financial software for freelancers – allows you to set away a percentage of each paycheck you receive, either in a separate bank account or directly to the IRS.
3. Keep in mind that the money is not yours.
Part of what makes paying taxes so tricky is that we become attached to money when we touch it, even though we know we’ll have to part with it shortly, according to Garofalo. “Part of the money you’re holding is not yours,” Garofalo explains, “so you need to separate yourself from it emotionally.”
This is where the traditional freelancing advice comes in: try putting a portion of each paycheck into a separate bank account. This prevents you from inadvertently spending the money you’ll need to pay taxes – and, hopefully, makes parting with that money less painful.
4. Think About Hiring an Expert
It is feasible to file your taxes on your own, but it is not simple. Before you believe that hiring a tax professional is out of your price range, shop about it; it may be less expensive than you think.
Like Taxes for Artists, Brass Taxes serves freelance clients across the country (while Yi León’s tax firm presently has a waitlist, Taxes for Artists is open for workshops and 1-on-1 tax consultations).
If you’re working with a pro and you’re still feeling overwhelmed, keep looking. Not every tax firm is used to working with independent contractors. “Your tax person must understand your industry, and you must feel comfortable speaking with them,” Garofalo says.
5. Relocate to Alaska – Just kidding.
The procedures and deadlines for quarterly tax payments differ by state. However, many are consistent with the federal government. If you truly want to simplify things, you should consider moving to one of the states that do not have a state income tax, such as Alaska or Florida.
That is not a viable idea for most people, but you should establish a plan for filing state taxes if required. “The caveat I always advise is verified with your state,” Yi León adds, adding that tax preparation software such as TurboTax modifies their vouchers to conform with differing state regulations and schedules.
Source: Union of Freelancers
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