Perhaps the largest difference in being a “regular” employee and being self-employed is, in most cases, independent contractors, freelancers, and other self-employed individuals are expected to pay estimated taxes. How does that work? Basically, if you’re self-employed (receiving a Form 1099) and need to pay over a certain amount in taxes, the IRS wants to receive payments from you throughout the year instead of simply getting a lump sum each April.
If you aren’t sure whether you should be paying quarterly estimated taxes or want to know more about how they work, here’s a quick guide to help you out.
What it means to be self-employed
As I alluded to in the intro, the easiest way to determine whether or not you’re technically self-employed is to look at the type of end of the year tax documents you have. W-2s are provided to employees who often have taxes withheld from their checks throughout the year. On the other hand, 1099s are provided to independent contractors and typically do not have taxes withheld. Simply stated, if you receive a Form 1099 (or, in some cases, multiple forms), you are self-employed in the eyes of the IRS and may be subject to paying quarterly estimated taxes.
Do all self-employed individuals need to pay estimated taxes?
Even if you are self-employed, you may not necessarily be required to pay quarterly taxes. According to the IRS, individual sole proprietors who expect to have to pay more than $1,000 in taxes for the year must make estimated payments. That limit is reduced to $500 for corporations. Additionally, if you do have taxes withheld from your paychecks, these is also a reduced chance that quartely payments will be necessary.
When are estimated taxes due?
Quarterly estimated taxes are due four times a year, starting with Tax Day (April 18th this year). Subsequent payments are due on June 15th, September 15th, and January 15th, assuming those fall on business days. Payments can be made online, by phone, or by good old-fashioned snail mail.
Calculating quarterly taxes
One to figure out your quarterly payments is to use the Form 1040-ES, which will help you calculate what you’ll owe. Alternatively, bookkeeping software like Quickbooks Self-Employed can help you keep track of your earnings and expenses as well provide you with quarterly tax estimates. Beyond that, a good starting place for calculating your next year’s tax bill is to look at how much you owed in the year prior (you’ll see why in a moment).
Penalties for not making quarterly payments
Not only does making quarterly payments make it easier for self-employed individuals to budget for their tax bill but paying on time will also help you avoid penalties. In order to escape penalties, those who owe more than $1,000 in taxes for the year must make on-time quarterly payments that add up to at least 90% of what you earned this year or at least 100% of what they owed the year prior. Late payments usually tack on an extra 5% of your total taxes owed for each month your payment is late (unless you have a good reason), not to exceed 25%. Other penalties can also be assessed, so be sure to pay on time.
As you’re preparing to send off your last minute tax return, you should also look into whether it’s time your start paying quarterly estimated taxes for the coming year. In fact, failing to do so if required could result in some hefty penalties you’ll want to avoid. Happy Tax Day!