How to Pay Quarterly Taxes

When do you start paying taxes? 

First off, congratulations! Take a moment to enjoy the success you’re having. However, with the new opportunity of growing your own business also comes managing the administrative side of running the business. These admin tasks tend to fall by the wayside more easily. If you’ve started to reach new levels of solo success, it’s probably time to start thinking about paying quarterly taxes, also known as estimated tax payments, to the IRS. So, how do you pay quarterly taxes as a freelancer, and what should you do to avoid penalties? 

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Do I need to pay quarterly taxes?

As a rule of thumb, if you expect to owe more than $1,000 in self-employed taxes for the year, you should be making quarterly payments. Your earnings and deductions will both factor into what you owe for taxes, but generally, you can expect to pay quarterly taxes once you’re earning $5,000 or more in profit. It’s not uncommon for estimated tax payments to creep up as your side hustle turns into more regular, reliable projects. 

Instead of paying your taxes at the end of the year, if you are self-employed, the IRS expects that you will be making regular estimated payments throughout the year based on what you expect to be making. When you make estimated quarterly payments, you’re paying what you estimate you’ll owe in both income tax and self-employment tax.

Self-employment tax includes Social Security and Medicare taxes for both the side you may be used to paying as a W-2 employee, as well as the side an employer would normally pay. You are now responsible for the dual role you hold as a freelancer of both employer and employee.

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What happens if I don't pay quarterly taxes? 

If you’re breaking out in a cold sweat because you haven’t paid quarterly taxes already, we want to reassure you. You’re not going to jail! Plus, getting set up to pay quarterly taxes isn’t as scary as you think, even if you should have been doing it already. 

Generally, if you haven’t been paying quarterly taxes, but have the tax liability that makes you eligible to pay them, you will incur some penalties, especially if you owe more than $1,000 in taxes. The IRS details penalties and how to figure out what you owe above your liability, but to put it plainly, what you owe will depend on how much you underpaid, when you underpaid, and the number of days that have passed since quarterly taxes for that period were due. You can have the IRS calculate what you owe for you and send you a bill. You can also go through the worksheet and calculate it yourself.

While penalties aren’t the scariest thing, they can add up. The IRS will back-calculate how much they think you should have paid every quarter and charge you monthly interest on top of the difference between what they thought you should pay and what you actually paid. In this way, keeping on top of what you think you owe will help you avoid this penalty in the future.

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How much should I set aside for quarterly taxes?

Now that you’re not in full panic mode, let’s talk about what you can do moving forward to ensure you are setting aside enough for quarterly taxes. A general rules of thumb is to set aside 30% of your taxable self-employed income (income minus expenses). Once you know what your income and expenses are, you can use a freelance tax calculator to determine your tax bracket and how much you need to set aside from your income to cover estimated taxes each quarter. If your personal tax situation is complex, its best to consult with a tax accountant to understand what your  effective tax rate is. We also recommend using a bookkeeping tool or a spreadsheet to track know what’s coming in and going out. Also make sure to record all the income you make, including cash payments.
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If this feels like too much work, you can also use the safe harbor rule. The IRS understands that not freelance work can be unpredictable and not everyone has the ability to calculate their taxes each quarter.  The safe harbor rules states that if you pay 100% of last year's taxes in the current year, generally divided by 4, paying that every quarter will keep you protected from penalty. If you expect to be making less this year, as long as you are paying 90% of what you expect to owe in taxes by the end of the year, you will also be covered. The exception to this rule is if you are making over $150,000 per year. You will then owe 110% to avoid penalties. So, if you plan to make about the same as you did last year, this may be the right methos for you.

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