Estimated Taxes for the Self-Employed

self-employed woman working in her office

The American tax system is considered a pay-as-you-earn system. Pay-as-you-earn means the IRS requires you to make payments towards your tax bill as you earn income. You are responsible for making payments toward your tax bill – either through an employer or by making estimated payments. 

If you work for someone, your employer will typically deduct withholdings based on your W-4. But when you are self-employed, you’re responsible for your withholdings. You can make estimated payments throughout the year or pay in a lump sum when you file your return. The best way to avoid a penalty fee for underpayment of taxes is to make estimated payments throughout the year and pay your taxes on time. Let’s look at what estimated payments can look like for those who are self-employed. 

Am I self-employed? 

You are considered self-employed if you have a side gig, side hustle, own a small business, or work freelance. Working for yourself means your taxes are not withheld automatically from your income. The source, amount, and frequency of your income probably vary which makes each tax circumstance unique. 

Should I pay quarterly payments or one lump sum? 

To ensure you don’t miss a payment and receive a fine, the IRS encourages self-employed taxpayers to “pay as you go, so you won’t owe.” Keeping records of all your income and expenses is extremely important and will make filing estimated taxes much more straightforward.    

If you think you’ll owe less than $1,000 in taxes, you can choose to either make estimated payments or pay it all as a lump sum when you file your tax return – without penalty. 

If you expect to owe $1,000 or more in taxes when you file your tax return, you should pay estimated taxes throughout the year. Additionally, you will need to ensure your payments are accurately estimated to avoid a penalty for underpayment of your taxes. You will not be penalized if you pay at least 90% of the current year’s tax bill through withholdings or estimated taxes. You can also avoid the penalty if you estimate your current year’s tax bill by paying the same amount (100%) from your prior year return. 

What happens if I miss a quarterly tax payment? 

If you are required to make quarterly payments and miss the deadline for making a payment, the IRS will charge you a penalty. Even if you are only a day late, they will penalize you for underpaying your taxes. 

The penalty amount depends on how much you owe and how late your payment is. If you pay immediately after the deadline, you will owe less than if you put it off. It’s always a good idea to review the IRS’s Guide for due dates to ensure estimated quarterly payments are on time.  

How do I make quarterly tax payments? 

As a first step, complete the worksheet portion of Form 1040-ES to determine the amounts of your estimated taxes. This form lists the payment due dates, as well as a list of documents needed to calculate the estimated tax. 

The IRS will allow you to make estimated quarterly payments in several ways. For example, you can use direct pay via bank account, credit or debit card, electronic federal tax payment system, mailing a check to the IRS, or paying cash with certain retail partners. How and where to send payments is also detailed on Form 1040-ES. 

What info will I need for Form 1040-ES? 

Self-employed workers should be prepared to answer questions about their expected adjusted gross income, what portion of that is taxable, and credits and deductions. Having a prior-year tax return is especially helpful while completing Form 1040-ES.   

How much will I owe each quarter? 

How much you pay each quarter depends on a few factors, including significant life events such as a death in the family or divorce. Self-employed workers should also consider tax laws, which change frequently. It’s a good idea to reference the IRS website for guidance on this topic. And you can use TaxSlayer’s Refund Calculator to estimate your tax liability.   

This article was last updated on October 24, 2022. 

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