When you do not have an employer withholding your taxes from your paycheck, you must be responsible for calculating your tax burden throughout the year and setting aside enough money to cover your payments.
It can be challenging to calculate how much you're going to owe in taxes, particularly if you just started freelancing or aren't sure how much you'll be earning. Learn more about what taxes you owe as a freelancer and how to budget for your quarterly tax payments.
When to Pay Estimated Taxes
When you have taxes withheld from a paycheck, the IRS receives those payments at regular intervals throughout the year. You are expected to do the same thing as a freelancer by paying estimated taxes. These are quarterly tax payments that you send to the IRS every three months.
You must pay estimated taxes throughout the year if you are earning a freelance income and expect to owe $1,000 or more at tax time. These payments should be the tax you owe on your income for the quarter that just happened.
Most states also require that you file estimated taxes. When these payments are due, and how much you will need to set aside, will vary by the state that you live in. Depending on where you live and earn an income, you may have to pay estimated taxes in more than one state.
Estimated tax payments are due by certain dates. Estimated taxes for the year are generally due on:
- April 15 of the current year
- June 15 of the current year
- September 15 of the current year
- January 15 of the following year
The IRS delayed the income tax return filing date for individuals from April 15, 2021, to May 17, 2021, giving you just over a month extra to file your 2020 tax return. However, your estimated taxes are still due on April 15. That due date has not changed.
Depending on your income and the tax you owed the previous year, the IRS may impose additional tax penalties if you don't pay your quarterly taxes on time, or if you do not pay enough in estimated taxes. However, even if you have underpaid your estimated taxes, you likely won't need to pay tax penalties if:
- Your estimated tax payments equal 100% of your tax burden the previous year
- You've paid at least 90% of your tax bill for the current year
- You owe less than $1,000 in taxes after subtracting your withholdings and credits
Remember, paying estimated quarterly taxes does not excuse you from filing taxes by Tax Day the next year. You must still file your federal, state, and local taxes. Once you calculate how much you have paid in estimated taxes, you will be able to determine whether you still owe additional taxes or are entitled to a tax refund.
Calculating Tax Payments for Freelancers
When you are a freelancer, you aren't just responsible for paying your income tax. You must also pay self-employment tax.
Self-employment tax is your FICA taxes—the Medicare and Social Security taxes that your employer would normally withhold from your paychecks in addition to income tax. When you're employed, you pay half, and your employer is obligated to pay the other half.
When you are self-employed, you are considered both your own employer and your own employee. This means that you have to foot the whole bill yourself. Self-employment tax is 15.3% of the first $142,800 of income you receive, plus 2.9% of anything you earn over this threshold.
The "employer" portion of the self-employment tax is deductible as a business expense.
Because freelancers must budget for both income tax and FICA taxes, you should plan to set aside 25% to 30% of your taxable freelance income to pay both quarterly taxes and any additional tax that you owe when you file your taxes in April.
You can use IRS Form 1040-ES to calculate your estimated tax payments.
Estimating Taxable Income
You don't have to save 20% to 30% of all your income, because you have costs associated with running your freelance business. You'll complete Schedule C at tax time, which will allow you to subtract your business expenses from your overall freelance income to arrive at your taxable income.
Keep track of your deductible expenses throughout the year, such as:
- Office supplies
- Travel expenses
- Mileage driven for business purposes
- Maintaining a home office
If you have been working as a freelancer for several years, you should have an idea of what your business expenses are, and you should adjust your estimated tax payments accordingly.
If this is your first year freelancing, you can estimate how much you should deduct. It's typically safer to estimate low rather than high, in order to avoid owing significant additional tax in April.
Once you deduct these expenses from your anticipated income, you can estimate the percentage of your income that you need to set aside for quarterly tax payments.
Always save the receipts for any business expenses that you deduct. You will need to prove those expenses if you are ever audited.
Budgeting for Taxes
In order to pay taxes as a freelancer, you need to regularly set money aside, both for quarterly payments and any additional tax you owe when you file. There are a few different ways you can do this.
Set Aside Money When You're Paid
Rather than trying to guess how much you're going to earn, or scramble to find the money you need to pay your tax bill, you can decide what percentage of your income you intend to pay in estimated taxes. Then, set aside that amount from each payment you receive as a freelancer.
The easiest way to do this is to set up a savings account that you've earmarked for taxes. Link that savings account to the checking account in which you deposit your freelance income, then automatically transfer a portion of that money to the savings account each time you make a deposit.
This is essentially a save-as-you-go plan, which works well for an inconsistent income and the realities of your day-to-day budget.
Pay at the End of the Month
Depending on the frequency with which payments come in, it can be a headache to remember to transfer some of every single payment you receive. One alternate method could be to calculate how much money you earned last month, then set aside 25% to 30% of it before you begin paying the next month's bills.
This tactic assumes that you’re already saving some of your income and that your account isn't empty, or won't become empty when you transfer the tax money. If you spend everything that comes into your account, set aside money for taxes before you begin paying your bills.
Estimate Your Earnings
You can also estimate how much you think you'll earn for the entire year at the beginning of the year, then calculate 25% to 30% of that and divide by four going forward. This is the amount you'll remit to the IRS each quarter.
This tactic works well if you've been freelancing for a few years. You can look at the 1099-MISC forms you received last year, then use these to estimate what you'll earn in the upcoming year.
For example, if you estimate that you'll make $60,000 in freelance income after you subtract business expenses, you can plan to pay 25% of that, or $15,000. This means you'll need to set aside $3,750 each quarter for your estimated taxes.
Paying Estimated Taxes Early
Keep in mind that you don't have to wait until the quarterly estimated tax due dates to pay your taxes as a freelancer. You just can't go beyond these dates without incurring a penalty.
Freelance income is often inconsistent, so it may be helpful to pay estimated taxes when you know you have the money rather than waiting until the quarterly deadlines. If you have a particularly high income one month, go ahead and pay your taxes early.
For example, if the next tax deadline is September 15th, but you receive several payments in August and don't expect any in September, pay your third-quarter taxes in August. Otherwise, you risk spending money that you should have been saving for taxes.
By paying your taxes early, you know exactly how much you have to spend for the rest of August and September.