5 Misconceptions That Freelancers Have About Quarterly Taxes
November 20, 2018
November 20, 2018
Successful freelancers know that they need to play many roles to keep the business running smoothly. One day you’re pitching your services to a prospective client, the next you’re working on a marketing plan to build your brand, all while also completing projects on a regular basis.
One role you may not relish as much: Accountant. Just as companies take money out of their employees’ paychecks each month to pay Uncle Sam throughout the year, freelancers are responsible for making regular tax payments as well. Since there’s no payroll department to take care of the calculations and payments on your behalf, freelancers need to set aside that money—for income taxes and self-employment tax, which includes Medicare and Social Security payments—for themselves.
While calculating and paying your taxes may not be the most exciting part of being a freelancer, it’s among the most important. If you don’t regularly set aside a portion of the money you collect for taxes, you may get slammed with a huge tax bill in April.
Since there’s no payroll department to take care of the calculations and payments on your behalf, freelancers need to set aside that money for themselves.
The concept of calculating and paying quarterly tax payments can feel overwhelming, but getting them right is easier than you think. Here’s a look at some common misconceptions about quarterly tax payments—and why you shouldn’t believe them.
Misconception # 1: Quarterly tax payments are optional.
The truth: The IRS collects taxes on a pay-as-you-go basis, meaning that if you earn money throughout the year, the tax code requires you to pay taxes on those earnings throughout the year, rather than waiting to square up in April. If you skip your quarterly tax payments, you’ll owe not only the taxes in April but also interest on the payments that were delayed.
“Just like everyone else, the IRS wants their money throughout the year,” says Keith Hall, an account and the president and CEO of the National Association for the Self Employed. “You can’t live in your apartment and then pay all your rent at the end of the year.”
Most states that collect income tax have a system that’s similar to the federal government’s quarterly payments system. So, you’ll have to not only set aside money for federal income taxes, but also for what you owe the state.
Misconception #2: I only have to pay quarterly taxes if I’m a full-time freelancer.
The truth: Even if freelancing is only your side-hustle, you probably still have to pay quarterly taxes. According to the IRS, Individuals (including sole proprietors, partners, and S Corporation shareholders) must make estimated tax payments if they believe their year-end tax bill will total $1,000 or more from freelance or self-employed income.
If you (or your spouse) holds a W-2 job, you might be able to have extra taxes withheld by your employer to minimize the amount you owe yourself. In that case, you should work with a tax professional to run the numbers and figure out what, if anything, you should still be paying each quarter.
Misconception #3: Quarterly taxes are just as complicated as annual taxes.
This is not as hard or as scary as you think it is. The most important thing is just to manage your cash flow and make sure you’re setting some money aside for the IRS.
The truth: Filing your tax returns in April takes way more work than simply making your quarterly payments. Filing your year-end taxes means going through reams of documents to make sure you’ve accounted for all expenses and are getting any applicable deductions. Paying your quarterly taxes simply requires making an estimated payment.
“This is not as hard or as scary as you think it is,” Hall says. “The most important thing is just to manage your cash flow and make sure you’re setting some money aside for the IRS.”
As long as you have the cash to make the payment, paying quarterly taxes literally only takes a few minutes. bSolo makes it even easier, automatically withdrawing cash for your tax payments from your personal bank account when client payments come in, scheduling, and sending tax payments on your behalf.
Misconception #4: You must pay taxes on your actual income each quarter.
The truth: You don’t need to calculate your actual income and expenses until you file your year-end taxes. Instead, the IRS allows freelancers to take advantage of the “safe harbor” provision, which allows you to use last year’s tax payments as a proxy for what you’ll owe this year. If you make quarterly payments that total the same amount as the taxes you paid last year, you won’t be subject to underpayment penalties, even if you earn significantly more this year. High earners –those who earn more than $75,000 ($150,000 for married couples filing jointly) have to make payments equal to 110% of last year’s taxes.
“That’s especially good for freelancers just starting a business, who are making more money ever year,” says Eve Davis, a enrolled agent based in Portland, Oregon. “In that case it can be hard to know how much money you’re going to make and figure out those quarterlies.”
Still, there is an option for freelancers who’d rather base their taxes on how much they expect to earn this year, need to pay at least 90% of what they earn. When you file your taxes at the end of the year, you’ll reconcile your payments with what you actually owe, just as you would if an employer withheld your taxes on your behalf. You’ll owe additional taxes (but no penalties) if you earned more than last year, and you’ll receive a refund if you’ve overpaid.
Misconception #5: My payments are due at the end of each calendar quarter.
The truth: While it would seem logical that you’d pay your quarterly taxes at the end of each quarter, the calendar is rather quirky. You quarterly payments are due on the following schedule:
- First quarter: April 15
- Second quarter: June 15
- Third quarter: September 15
- Fourth quarter: January 15 (of the following year)
Since the dates are hard to remember, you might need to set up calendar alerts to remind you when taxes are due. Or, you can use bSolo to keep track of when your payments are due and make them on your behalf.