Being self-employed comes with some unique tax responsibilities, including budgeting for the taxes you're going to owe the Internal Revenue Service (IRS) at year's end. You must calculate your tax burden throughout the year and set aside enough money to cover your payments, because you don't have an employer withholding your taxes from your paycheck.
It can be challenging to calculate how much you're going to owe, particularly if you've just started freelancing or you aren't sure how much you'll be earning this year. Learn more about what taxes you owe as a freelancer and how to budget for your quarterly estimated tax payments.
When to Pay Estimated Taxes
The IRS receives payments at regular intervals throughout the year when you have taxes withheld from your paychecks. Your employer is responsible for sending that money in by certain deadlines. You're expected to do the same as a freelancer by paying estimated taxes. These are quarterly payments that you should send to the IRS every three months.
You must pay estimated taxes throughout the year if you're earning 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's just passed.
Most states also require that you file estimated taxes. When these payments are due and how much you'll have to set aside will vary by your state of residence. You may have to pay estimated taxes to more than one state, depending on where you live and where you earn income.
Estimated tax payments 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, in response to the coronavirus pandemic, giving you just over an additional month to file your 2020 tax return. Your estimated taxes were still due on April 15, however.
Due to the disruption caused by Hurricane Ida, Louisiana residents and business owners have until Jan. 3, 2022, to file and pay their quarterly individual and business tax returns. Residents of Mississippi and certain counties in New York, Pennsylvania, and New Jersey are also eligible for relief. You can consult IRS disaster relief announcements to determine your eligibility.
Penalties for Late Payments
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 don't pay enough in estimated taxes. But you may not have to pay tax penalties, even if you've underpaid your estimated provided that:
- 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 that paying estimated quarterly taxes does not excuse you from filing tax returns by Tax Day the next year. You must still file your federal, state, and local tax returns. You'll be able to determine whether you still owe additional taxes or are entitled to a tax refund when you've calculated how much you've paid in estimated taxes.
Calculating Tax Payments for Freelancers
You aren't just responsible for paying income tax on your earnings. You must also pay the self-employment tax when you're a freelancer.
The 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. You pay half when you're employed, and your employer is obligated to pay the other half, but you're considered both employer and employee when you're self-employed. That means that you have to foot the whole bill yourself.
The self-employment tax is 15.3% of the first $142,800 of income you receive, plus 2.9% of anything you earn over that threshold, as of the 2021 tax year. The same tax rates apply in 2022, but with a higher threshold at $147,000.
The "employer" portion of the self-employment tax is deductible as an adjustment to income.
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. Freelancers must budget for both income tax and FICA taxes.
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 of your income, because you're allowed to deduct costs associated with running your freelance business. You'll complete Schedule C at tax time, which allows 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, including:
- Office supplies
- Travel expenses
- Mileage driven for business purposes
- Maintaining a home office
You should have an idea of what your business expenses are if you've been working as a freelancer for several years, so you can adjust your estimated tax payments accordingly.
You can estimate how much you should deduct for expenses for purposes of your quarterly payments if this is your first year freelancing. It's typically safer to estimate low rather than high in order to avoid owing significant additional tax come April. You can estimate the percentage of your income that you need to set aside for quarterly tax payments once you deduct these expenses from your anticipated income.
Always save receipts for any business expenses that you deduct. You'll have to prove those expenses if you're ever audited.
Budgeting for Taxes
Regularly set money aside for both quarterly payments and any additional tax you owe when you file. You can do that in a few ways.
Set Aside Money When You're Paid
You can decide what percentage of your income you intend to pay in estimated taxes rather than trying to guess how much you're going to earn, or scrambling to find the money you need to pay your tax bill. Then set aside that amount from each payment you receive as a freelancer. The easiest way to do that is to set up a savings account that you've earmarked for taxes. Link that account to the checking account in which you deposit your freelance income, then automatically transfer a percentage of that money to the savings account each time you make a deposit.
This is essentially a save-as-you-go plan. It works well for an inconsistent income and the realities of your day-to-day budget.
Pay at the End of the Month
It can be a headache to remember to transfer some of every single payment you receive, depending on the frequency with which your payments come in. An alternate method could be to calculate how much money you earned last month, then set aside 25% to 30% of that 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 that it won't become empty when you transfer the tax money. Set aside money for taxes before you begin paying your bills if you tend to spend everything that comes into your account.
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 that number by four going forward. That 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 or 1099-NEC forms you received last year, then use the information to estimate what you'll earn in the upcoming year. 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. That 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. Pay your third-quarter taxes in August if the next tax deadline is September 15th, but you receive several payments in August and don't expect any in September. Otherwise, you'd risk spending money that you should have been saving for taxes.
You'll know exactly how much you have to spend for the rest of August and September if you pay your taxes early.
Frequently Asked Questions (FAQs)
What is freelance work?
Freelance work is work performed by an independent contractor. It's not employment per se. The person or company commissioning the work is not doing so in an employer's capacity. A freelance worker can determine when the work is done, and there's typically a contract that spells out the specifics that both parties agree to. Taxes aren't withheld when the freelancer is paid, because freelance work isn't employment. Freelance workers are responsible for their own taxes.
How do you file taxes for freelance work?
You must file a tax return if your earnings were $400 or more if you do freelance work. You'll file Schedule C as a sole proprietor, along with your personal tax return. You can file your taxes yourself or work with a tax professional. A tax professional can be well worth the expense if you have income from multiple sources, have worked in multiple states, or want additional assistance.