How to make paying quarterly taxes less miserable

Jul 22, 2021

Quarterly tax deadlines come around like clockwork, four times a year, but even for seasoned freelance professionals, remembering to pay the Tax Man quarterly (and having the cash available to do it) can be easier said than done.

A quick intro to those who are new to freelancing, or who are considering leaving a staff job to become self-employed: When you’re employed by a company and get paychecks, your employer deducts certain taxes from your paycheck on your behalf, including your federal income tax, the payroll taxes that fund Social Security and Medicare, and sometimes state income taxes as well. But once you’re self-employed, you’re responsible for sending in those tax payments. And since you’re considered your own employer, you have to pay a bit extra in “self-employment tax” to contribute to Social Security and Medicare (companies pay some of these taxes on their employees’ behalf).

In other words, even though your full tax return is only due once per year, you need to make tax payments shortly after earning the money – once per quarter. It’s called a “pay as you earn” system.

For 2021, the remaining quarterly tax deadlines are September 15, 2021, and January 17, 2022.

Paying taxes will probably never be fun, but if you do a little bit of planning (and lower your expectations), it doesn’t have to be completely miserable.

1. Choose the Simplest Possible Method to Find Your Payment Amount

The main reason to pay your quarterly estimated taxes is to avoid getting hit with an underpayment penalty. If you’re earning a bunch of money and not paying any taxes until you file your annual return, the government will be displeased about your tardiness and tack on some extra money onto your final tax bill in the form of a penalty.

To avoid the underpayment penalty, you can choose between two approaches: you can either make quarterly payments equal to 100% of your previous year’s tax bill (110% if you earn more than $150,000), or quarterly payments equal to 90% of your current year’s tax bill.

It sounds a little complicated, but if you expect to make about the same as you did last year, you can follow the first approach, which is actually pretty simple. For 2021, you’d take the amount of tax you paid on your 2020 return, divide it by four, and that’s your quarterly estimated tax amount. Pretty easy! (If you’re just now getting around to thinking about things this year, you’d want to pay 75% of your 2020 tax bill before September 15, 2021, and the other 25% before January 17, 2021). Multiply those numbers by 1.1 if you’re a high earner.

Of course, if you end up making a lot more money in 2021 than you did in 2020 (or end up having a bigger tax bill for other reasons), you’d still need to pay additional taxes when you file your annual tax return, but you wouldn’t be hit with a large penalty.

But this approach isn’t great for everyone. If your income drops by a huge amount, you might not want (or be able) to make excessively large payments that will just end up being refunded at the end of the year. If your income rises by a huge amount, you’ll probably want to go ahead and start paying the tax money that you’re eventually going to owe, even if you’re not at risk of a penalty.

If you take the second approach – trying to approximate what you’ll owe in taxes for the current year – you should know that unless you’re a fortune teller, your odds of getting the number exactly correct are basically zero. After all, even if you’ve calculated your profit for this quarter, if you don’t know what your profit is going to be next quarter, you won’t hit the number on the nose. And that’s OK, explains Rus Garofalo, founder of Brass Taxes, a firm that specializes in taxes for freelance professionals. “We’re just trying to get in the ballpark, we’re not trying to hit a bullseye,” he told me, adding, “I think people get overwhelmed and want to get it exactly right, which just isn’t an option for something like this.”

It’s also helpful to keep in mind that the size of the penalty itself is relatively small: about 3% for a full year, so the penalty for underpaying by even $2,000 would generally be $100 or less. While the formula for the penalty is complicated, it’s based on the amount you underpaid and how many quarters you were late.

Unfortunately, the federal government doesn’t offer much help when it comes to choosing how much to pay quarterly, but as Claudia Yi León, founder of Taxes for Artists, points out, with a few small tweaks, the IRS’ withholding estimator can be used for this purpose.

2. Automate What You Can

“Do all your thinking once, and then schedule everything out, so you never have to think about it again,” suggests Yi León. Her approach is to calculate her payments and use Gmail’s “schedule send” function to send herself an email with the dollar amount and the link to the IRS payment site, timing it to land in her inbox a few days before the payment is due.

If you’re old-school and use the paper vouchers that a tax preparer gives you, you can still do some of the work in advance by addressing your envelopes to the IRS, licking the stamps, and putting the checks and vouchers inside. Place the envelopes somewhere visible so you won’t forget about them – you can even write the deadline somewhere small on the envelope.

If you’re planning to pay a fixed percentage of your income in estimated taxes, that can be automated too. Most major banks will only let you automate transfers of a fixed dollar amount, but Catch, financial software for freelancers, lets you set aside a percentage of each paycheck you receive, either moving it into a separate bank account or paying it directly to the IRS.

3. Remember: The Money Isn’t Yours

Part of what makes paying taxes so hard is that we become attached to money as soon as we touch it, even if we know we’re destined to part with it soon, says Garofalo. “Part of that money you’re holding,” Garofalo says, “is not yours, so you need to emotionally disassociate yourself from it.”

This is where the classic freelancer advice comes in: consider moving a certain percentage of every paycheck into a separate bank account. Doing so protects you from accidentally spending the money you’ll need to pay taxes – and, hopefully, makes parting with that money a bit less traumatizing.

4. Consider Expert Help

It’s possible to do your taxes on your own, but it isn’t easy. Before you assume that paying a tax professional is financially out of reach, shop around; it may be less expensive than you expect. Brass Taxes serves freelance clients across the country, as does Taxes for Artists (although Yi León currently has a waitlist on her tax practice, Taxes for Artists is available for workshops and 1-on-1 tax consultations).

If you are working with a professional and you’re still overwhelmed, keep looking. Not every tax firm is used to working with freelancers. “Your tax person has to understand your industry, and you have to feel comfortable talking to them,” says Garofalo.

5. Move to Alaska – Just Kidding

The rules and deadlines for quarterly tax payments vary from state to state, although many align with the federal government. If you really want to simplify things, you’ll need to move to one of the states without a state income tax, like Alaska or Florida. Obviously, that’s not a practical suggestion for most people, but you should make sure you have a plan for filing state taxes, if you’re required to do so. “The caveat I always say is check with your state,” says Yi León, adding that tax prep software like TurboTax also adjusts their vouchers to comply with varying states’ laws and schedules.

This article is for informational purposes only, and may not apply to your specific situation.

Elena Botella

Elena Botella is a freelance journalist based who covers business, finance and money. Her work has appeared in Slate, Forbes.com, American Banker and other outlets.