Taxes for freelancers are excruciatingly complicated for a simple reason. W2-employees have taxes withheld when they get paid. However, freelancers or self-employed individuals have to figure out their tax burden to both the federal government and the state, just like a small business would. Small businesses hire accountants, book-keepers, and CPAs to handle their accounts and taxes. That’s what the IRS expects from you if you have any self-employed income.
In the following article, you’ll learn that you need to know about the Quarterly Estimated Taxes, the sort of deductions you should be taking, the forms, and any other additional information that might come in handy.
Not sure if you’re self-employed or a freelancer?
OK, let’s get some terminology out of the way first. These are all the same things from the point-of-view of the IRS:
- Self-employed
- Independent contractor
- Freelancer
- Gig-worker
- 1099 worker
The IRS has only one category: “self-employed”. And all the above terms refer to the same tax status. Essentially those not getting a W2 and therefore not having their taxes withheld.
What are quarterly estimated taxes?
Quarterly taxes or Estimated Taxes are meant for self-employed individuals or freelancers. These are the people who do not have taxes automatically withheld from their earnings, thus, they have to pay their taxes to the IRS throughout the year on a quarterly basis. These taxes are used to pay:
- Federal Income tax
- State income tax
- Self-employment taxes
- Social security
- Medicaid/medicare
In addition to these, freelancers also have to worry about:
- Capital gains taxes: both short term and long term gains
- AMT or Alternative Minimum Taxes for those earning over $100k annually
The Internal Revenue Service (IRS) requires quarterly estimated tax payments to be filed by those who have income that is not subject to automatic withholding (W-2 employees). However, as a freelancer, this task falls upon your shoulders. You are required to pay those taxes to the government quarterly.
Do I have to pay the estimated taxes?
If you are a self-employed individual or a freelancer, you most probably owe quarterly taxes. However, under certain circ*mstances, you may be already paying enough in taxes during the year. Here are some situations where you don’t.
First, if you’re a W-2 employee where your taxes are already being withheld for you and you typically get a tax refund, you may not need to pay quarterly taxes, assuming that you make very little freelance income, like under $5k annually.
Also, you may not have to pay quarterly taxes if you have already paid at least:
- 90% of your estimated tax owed for the current year
- 100% of the tax amount owed shown on your return for the prior year
In such cases, your tax liability is almost completely taken care of. However, this is most common for people who have received a refund for the previous year’s tax and use that to pay their upcoming year’s taxes.
Quarterly estimated tax calendar
Estimated tax payments (1040-ES) are due on a quarterly basis, the following represents the quarterly tax due dates:
Payment Period | Due Date |
January 1 – March 31 | April 15, 2021 |
April 1 – May 31 (note its only 2 months) | June 15, 2021 |
June 1 – August 31 | September 15, 2021 |
September 1 – December 31 (note: 4 months) | January 18, 2022 |
If the due date happens to fall on a Saturday, Sunday, or gazetted holiday that year, you can pay on the next business day. Also, if you file your taxes by January 31st, you can just make the rest of your tax payments for the previous year then.
What if I don’t pay quarterly taxes?
It’s better to pay your taxes on time otherwise the IRS will charge penalties if you don’t pay enough tax throughout the year. The IRS can charge a penalty for delayed or inadequate payments even if you’re due a refund when you file your tax return.
These penalties can be very steep.
Example: If your third quarter payment was due September 15, 2020, and you paid it a few weeks after that due date, the IRS will consider this payment made in the fourth quarter. You’ll receive a notice from the IRS informing you of any estimated tax penalties and fees.
What you must remember is that if you miss a quarterly tax due date, the penalties and interest charges that can accrue depend on how much you make and how late you are. The IRS generally charges a penalty of .5% of the tax owed following the due date. For each passing day that you don’t pay the tax, the percentage would increase. The penalty limit is set at 25% of the taxes owed.
How to calculate quarterly taxes?
To ensure that you pay the correct amount of estimated taxes, you must keep tabs on your expenses. You can either use bookkeeping software (a bookkeeper) which tends to be very complex and costly or use newly created freelance tax services, like FlyFin A.I., that automates your tax payments for every quarter and not just at the end of the year. These apps allow you to track expenses and income on an “ongoing” basis, and thus make the computation of quarterly taxes very easy and accurate.
There are many quarterly tax calculators on the web but they are highly imprecise. It’s important to use an accurate one - so that you don’t overpay. You also don’t want to underpay and accrue steep penalties, not to mention getting “red-flagged” by the IRS.
Generally, the IRS’ Estimated Tax Worksheet found within the Form 1040-ES (for individuals and freelancers) and Form 1120-W (for corporations) are used to figure out the estimated tax. The form will help you figure out the amount you’ll owe for the year, divide it by four (quarters), and pay in equal installments before the tax due dates. Or as we mentioned before, the easier method is to let the software/apps handle it for you.
We highly recommend FlyFin’s quarterly tax calculator to make your taxes effortless.
FlyFin’s quarterly tax calculator provides the most accurate quarterly tax calculations based on your income and deductions. On average, 75% of freelancers are already overpaying their taxes as most of them do not consider deductions while estimating quarterly taxes. While the rest of the freelancers face steep penalties due to late or underpayments.
FlyFin A.I. scans your expenses and automatically finds deductions, also reviewed by CPAs. You just have to answer a few questions and get an accurate quarterly tax amount within 5 minutes with zero effort.
How to file quarterly taxes and what are the payment methods?
Once you have calculated what you owe for each quarter all you need to do is file Form 1040-ES. You can send estimated tax payments with Form 1040-ES by email, or you can pay it online.
Some of the other payment methods include:
- Electronic Federal Tax Payment System (best option for businesses or large payments; enrollment required)
- Electronic Funds Withdrawal (during e-filing)
- Same-day wire
- Check or money order
- Cash
You can also rely on FlyFin, which automatically calculates your taxes, and allows you to pay directly to the IRS with just one click.
Will automating my quarterly taxes maximize my savings?
There are multiple ways to keep a tab on your expenses, ranging from book-keeping to using some software, but the latter is more preferable since it reduces the burden of keeping a track of all your receipts. Maintaining a spreadsheet is a hectic task and is somewhat equivalent to guesswork.
Going digital has its perks, FlyFin works around the clock, the AI finds deductions every time an expense occurs and helps you maximize your savings.
FAQs
Ques. What happens if I don’t pay quarterly taxes and wait until April?Ans. If you owe more than $1,000 in taxes and do not pay these taxes quarterly, you’ll be charged with an underpayment penalty by the IRS.
However, you can avoid the penalty if you meet either of these conditions:
- You didn’t pay due to a disaster or an “unusual circ*mstance.”
- You retired or became disabled during the tax year.
You can learn about how to declare these waivers on page 2 of the instructions for Form 2210.
Ques. Can I pay my quarterly taxes online?
Ans. Yes, you can pay your quarterly taxes online by visiting the official IRS website at -https://www.irs.gov/payments.
Ques. What is the purpose of Form 1120-W?
Ans. If you're registered as a sole proprietor or a self-employed individual, you’re required to file Form 1040-ES. For other types of entities (corporation), a Form 1120-W is required. Corporations usually use Form 1120-W Worksheet to calculate their taxes.
Ques. Should self-employment taxes be paid quarterly or yearly?
Ans. Generally, as a self-employed individual, you are required to file an annual return and pay your estimated tax quarterly. You must pay self-employment tax (SE tax) as well as income tax. Estimated tax is necessary to pay Social Security and Medicare taxes and income tax because you do not have an employer withholding these taxes for you. Please refer to Form 1040-ES, Estimated Tax for Individuals to figure these taxes.
Ques. How does FlyFin AI calculate my quarterly taxes?
Ans. FlyFin AI automatically finds every deduction. All you have to do is answer a few basic questions and A.I. will accurately calculate your quarterly tax payments. The entire process hardly takes five minutes. Moreover, you get to consult a CPA to prepare your quarterly taxes for free.
