When Should Estimated Taxes Be Paid?
The Internal Revenue Service (IRS) receives payments regularly throughout the year when you have tax withholdings from your paychecks. Your employer is responsible for sending this amount within the specified time frames. You are expected to do the same as an independent contractor by paying estimated taxes. These are the quarterly payments that you must send to the IRS every three months.
Late Payment Penalties
The IRS can impose additional tax penalties based on your income and the tax you owed last year if you do not pay your quarterly taxes on time or if you do not pay enough estimated taxes. However, you may not have to pay tax penalties even if you paid the amount of estimated taxes due last year, as long as you paid at least 90% of your total tax bill for the current year and you owe less than $1,000 in taxes after accounting for your deductions and tax credits.
Calculating Tax Payments for Freelancers
You are not only responsible for paying income tax on your earnings, but you must also pay self-employment tax when you are a freelancer. The self-employment tax is the Social Security and Medicare tax that would typically be withheld from your paychecks if you were an employee, and a sizable portion of it would also be paid by your employer. However, the freelancer is considered both a worker and an employer when they are self-employed, which means you must pay the entire amount yourself. The self-employment tax rate is 15.3% on the first $147,000 of income earned in 2022 and $160,200 in 2023. If you earn more than that, you won’t owe Social Security tax, but you still have to account for Medicare tax. There is also an additional 0.9% Medicare tax for high earners.
Estimating Taxable Income
You do not need to set aside 20% to 30% of your entire income, as you are allowed to deduct business expenses associated with your self-employment. You will complete Schedule C at tax time, which allows you to deduct your business expenses from your total gross self-employment income to arrive at your taxable income.
Budgeting for Taxes
Set aside a specific amount of your income for estimated taxes rather than trying to guess how much you will earn or searching for the money you need to pay your tax bill. Then allocate this amount from each payment you receive as a freelancer. The easiest way to do this is to create a tax savings account. Link this account to the checking account where you deposit your income, automatically transferring funds from the checking account to the savings account each time you make a deposit.
The Importance of Early Payments of Estimated Taxes
Remember, you do not have to wait until the due dates for quarterly estimated taxes to pay your taxes as a freelancer. However, you cannot miss these deadlines without being subject to penalties.
Frequently Asked Questions
What is Freelance Work?
Freelance work is work done by an independent contractor. It is not a job in the traditional sense. The person or company hiring the work does not do so as an employer. A freelancer can determine when the work is completed, and there is usually a contract outlining the details agreed upon by both parties. Taxes are not withheld when paying a freelancer, as freelance work is not considered employee work. The freelancer is responsible for paying their own taxes.
How to File Taxes for Freelance Work?
You must
You must file a tax return if you earn $400 or more if you are self-employed. You will file Schedule C as a sole proprietor, along with your personal tax return. You can file tax returns yourself or work with a tax professional. A tax professional may be warranted if you have income from multiple sources, if you’ve worked in multiple states, or if you want additional assistance.
Source: https://www.thebalancemoney.com/how-much-do-i-budget-for-taxes-as-a-freelancer-453676
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