You’re now a freelancer or working on a part-time side hustle. That’s awesome. But there’s one ugly thing to take care of: taxes.
Ordinary employees in the United States get a form called a W-4. Basically, a W-4 tells companies how much money to put away for taxes every time you get paid.
But you’re not an ordinary employee.
Because freelancers and side hustlers aren’t full-time employees, they have to send the IRS estimated quarterly taxes each quarter. Freelancers and side hustlers are legally considered independent contractors.
Independent contractors have to send the IRS tax payments each quarter based on their income. These (which can be good or bad) or estimated payments, which means that you can either get a refund or have to pay more at the end of year.
Estimated tax payments are made each quarter on income that isn’t subject to withholding tax. Basically, this means income from being self-employed, a freelancer, or an independent contractor, or income like interest, dividends, and business earnings.
There are numerous estimated tax payment calculators available online, but you face penalties if the amounts are off by too much. That’s why we recommend you have an accountant if you’re freelancing or side hustling.
The IRS requires you, in estimated payments, to pay either 90% of your tax for the current year–even if you don’t know how much you are making yet–or the tax on last year’s return to avoid an estimated tax penalty.
Estimated tax penalties can be very expensive, and can mean paying the IRS thousands of dollars each you that you don’t have to.
This is problematic for many freelancers in situations where they make a lot of money in one year and then have a slow period the next year. The IRS’ rules mean that, for most people, they have to pay based on their previous year’s income. This stinks, in our opinion, but it is what it is and something freelancers need to budget for.
There’s an art and a science to estimated tax payments and making sure your freelance business isn’t hit by an unwelcome surprise on April 15. For more information, check out these two links:
- Estimated Taxes (IRS)
- Here’s A Surefire Tax Estimating Process For Freelancers (Rebooted And Updated) (Josh Fruhlinger / The Billfold)
Have any suggestions or tips for freelancer estimated taxes? Leave them in the comments below or contact us!
Self-Employed Tax Tips: Other Resources
Amazon: U.S. Master Tax Guide (2017) by CCH Tax Law Editors
Amazon: J.K. Lasser’s 1001 Deductions and Tax Breaks 2017: Your Complete Guide to Everything Deductible by Barbara Weltman
Amazon: 475 Tax Deductions for Businesses and Self-Employed Individuals: An A-to-Z Guide to Hundreds of Tax Write-Offs by Bernard B. Kamoroff C.P.A.