If you’re new to being self-employed or working in the gig economy, you might be asking a lot of questions about estimated quarterly taxes. It can feel overwhelming.
Here’s the basic idea: If you’re self-employed, freelancing, or working as an independent contractor, taxes are not automatically withheld from your paycheck as they would be if you were a W-2 employee. So instead, you are responsible for estimating how much you owe in taxes on the income you’ve earned and paid the IRS the estimated amount in installments throughout the year.
Below, we take a look at some common questions.1
Should you be making estimated quarterly tax payments?
You should likely be making estimated quarterly tax payments to the IRS if:
- You aren’t having enough withheld – that is, you expect to owe at least $1,000 in federal income taxes for the year, or refundable credits cover less than 90% of your tax liability for this year, or 100% of last year. This includes many independent contractors, freelancers, and gig workers, because their taxes aren’t withheld by an employer.
How do you calculate estimated quarterly taxes?
Here are two ways to calculate how much you’ll owe:
- If your income is fairly consistent throughout the year, you can estimate the amount you will owe for the year, then send one-fourth of that to the IRS each quarter.
- If your income varies, estimate how much you’ll owe for the year based on what you’ve earned so far this year or in the last few months. Then assume the same income for the rest of the year and send quarterly payments based on that amount.
You can use IRS Form 1040-ES to calculate and pay your estimated quarterly payments.
Estimated quarterly tax payment calculations can get complicated, so it’s a good idea to consult a qualified tax preparer. In the event you overestimated or underestimated your earnings, complete another Form 1040-ES and refigure the estimated tax for the next quarter.
Curious about what estimated quarterly taxes might cover? We discussed this topic in-depth here.
How do you to save for taxes?
As an independent worker, taxes are not automatically withheld from your income. Make sure to estimate your taxes for the year and set aside a portion of each paycheck to pay quarterly taxes so you don’t end up with a large (unexpected) bill when tax time rolls around. When you bank with indi, you’re able to get a personalized Tax Savings Goal, automatically set aside a portion of each paycheck to save for taxes and access financial wellness tools designed for independent workers.
When do you pay estimated quarterly taxes?
According to the IRS:
“You may send estimated tax payments with Form 1040-ES by mail, or you can pay online, by phone or from your mobile device using the IRS2Go app. Visit IRS.gov/payments to view all the options. For additional information, refer to Publication 505, Tax Withholding and Estimated Tax.
Using the Electronic Federal Tax Payment System (EFTPS) is the easiest way for individuals as well as businesses to pay federal taxes. Make ALL of your federal tax payments including federal tax deposits (FTDs), installment agreement, and estimated tax payments using EFTPS. If it’s easier to pay your estimated taxes weekly, bi-weekly, monthly, etc. you can, as long as you’ve paid enough in by the end of the quarter. Using EFTPS, you can access a history of your payments, so you know how much and when you made your estimated tax payments.”
There is a lot to learn about paying taxes as an independent contractor, freelancer, or gig worker. Stay tuned to the indi blog to learn more, and rely on reliable sources of information such as IRS.gov Small Business and Self-Employed Tax Center and TaxSlayer’s Blog for Self-Employed Tax Tips.