Paying Uncle Sam after tax day in April sounds crazy, right? Well, that’s the ugly truth for freelancers, Airbnb hosts, rideshare drivers, or anyone else who gets a 1099 at the end of the year. If you’re self-employed, you have four tax days a year. These are otherwise known as quarterly estimated tax payments. Confused? You’re not alone.
Over two-thirds of freelancers don’t understand their self-employment tax obligation. With your next payment just around the corner—in fact it’s this Thursday, June 15, to be exact—we put together a quick rundown to answer any questions you may have about paying your quarterlies.
Who has to pay?
Well, pretty much everybody. Here in the United States we use what’s called a “pay-as-you-go” system for collecting income tax. This means you’re expected to pay taxes on the income you earn throughout the year. This is something often overlooked when working a W-2 job because employers are required to automatically withhold money for taxes and pay the IRS on your behalf.
When you’re self-employed, there is no one there to withhold money for you or pay the IRS. It’s ALL on you to make sure Uncle Sam is getting his money. There are a few exceptions, but if you’re expecting to owe over $1,000 in self-employment taxes this year, you need to pay taxes quarterly.
Do I HAVE to pay them?
Neglecting to pay quarterly estimated taxes can get expensive. If you do miss a payment, you’ll be charged a penalty and have to pay interest on the unpaid balance of the missed payment. While missing one payment may not break the bank, missing multiple quarterly estimates can add up quickly. The last thing you want is to get to tax day only to be blindsided by a big bill from the IRS.
How much should I expect to pay? How do I get payments to the IRS?
There are a few ways to calculate how much you should pay and how to send the payments. The method you should use depends on a few things about your work.
If you earned 1099 income and paid self-employment taxes last year, you can base your quarterly payments off of the amount you paid last year. The IRS Form 1040-ES is the go-to resource for calculating what you need to set aside for this year’s payments. If your work is fairly steady, you can always refer to what you paid last year. Planning to pay 100 to 110 percent of what you did last year is good rule of thumb to avoid underpayment.
If this is the first year you’ve earned 1099 income, or if your work is seasonal, you can use what the IRS calls the annualized payment method. This simply means that you pay Uncle Sam a percentage of that particular quarter’s earnings instead of a flat rate for each quarter of the year. To use the annualized payment method, you’ll want to use IRS Form 2210. For more information on how to get your payments to the right place, check out these guides on paying federal and state quarterly taxes.
What if I overestimate or underestimate my payments?
No worries. The IRS will let you know. If you’re lucky enough to have made more money than what you estimated from the year prior, you’ll get a note from the IRS letting you know the amount you underpaid for the year. If you have an off year and overestimate your quarterly payments, you will receive a refund at the end of the year or you can just apply that amount to the next year’s tax obligation.
When are quarterly tax payments due?
Remember to mark these dates on your calendar to avoid having to pay those pesky IRS penalties:
1st payment..............April 18, 2017
2nd payment............June 15, 2017
3rd payment.............September 15, 2017
4th payment.............January 16, 2018*
*You do not have to make the payment due January 16, 2018 if you file your 2017 tax return by January 31, 2018, and pay the entire balance due with your return.
How can I make handling quarterlies easier?
Having to pay the government four times a year sucks—there’s no way around it. However, there are a few really simple ways you can take the night sweats out of quarterly taxes. The key to getting your payments in on time is to make sure you’re keeping up with how much you owe each time you earn 1099 income. This probably sounds a little tedious so that’s why we created Painless1099.
Painless1099’s smart bank accounts automatically calculate and withhold the money you need to save for taxes every time you get paid and then send what’s safe for you to spend directly to your personal checking account. That way, you’ll always know your tax obligation is squared away and can focus on doing the work that got you into self-employment in the first place.
Nick Green is the Director of Business Development at Painless1099. Painless1099 automatically separates money for taxes every time you get paid by a client.
This is a post from Painless1099 – current sponsor of our SPARK program! Freelancers Union members get save 15% when you open an account with Painless1099. Learn more here.