Regardless of the type of freelance work you do, you are required to pay taxes on a quarterly basis.
Why? Because your employer is not removing those taxes automatically from each payment. Rather it is your
sole responsibility to calculate your quarterly tax amount and make timely payments. But understanding
how much and when often bring about stress and tend to steal time away from your work. In the
following paragraphs, I will discuss the appropriate method for calculating your quarterly taxes, the
terminology involved with that process, and ultimately how to submit those quarterly tax payments once
they’ve been properly calculated.
Most importantly, let’s determine if you do indeed have to pay quarterly taxes. According to the IRS, all
income earned through a taxpayer’s business, as an independent contractor or from informal side jobs is
self-employment income, which is fully taxable and must be reported on Form 1040. However, you don’t
have to pay estimated tax for the current year if you meet all three of the following conditions:
- You had no tax liability for the prior year
- You were a U.S. citizen or resident for the whole year
- Your prior tax year covered a 12-month period
This should clear up any misconceptions – any money earned through freelancing or side gigs you must
pay taxes on unless you meet all three conditions as described. But more likely than not, you are in the
vast majority of freelancers and must pay taxes. And the best way to lessen the burden of these taxes is to pay quarterly taxes.
Before diving into the details of calculating those quarterly tax payments, let’s review the common IRS
terms that you will need to know in order to successfully make the calculation. First and foremost, your
adjusted gross income or taxable income is the amount of money you earned freelancing minus any
deductions, such as medical expenses, unreimbursed business expenses, etc. Secondly, there are five filing
statuses that are necessary to understand before calculating your quarterly taxes. Those five filing statuses
include single, married filing jointly, married filing separately, head of household, and qualifying widower
with dependent child(s). Here’s a quick breakdown of those filing statuses in more detail:
- Single: Your filing status is single if you are considered unmarried and you do not qualify for
another filing status.
- Married Filing Jointly: You can choose married filing jointly as your filing status if you are
considered married and both you and your spouse agree to file a joint return. On a joint return,
you and your spouse report your combined income and deduct your combined allowable
expenses. You can file a joint return even if one of you had no income or deductions.
- Married Filing Separately: You can choose married filing separately as your filing status if
you are married. This filing status may benefit you if you want to be responsible only for your
own tax or if it results in less tax than filing a joint return. If you and your spouse do not agree
to file a joint return, you must use this filing status unless you qualify for head of household
- Head of Household: You may be able to file as head of household if you meet all the following
- You are unmarried or “considered unmarried” on the last day of the year.
- You paid more than half the cost of keeping up a home for the year.
- A qualifying person lived with you in the home for more than half the year (except
for temporary absences, such as school). However, if the qualifying person is your
dependent parent, he or she doesn’t have to live with you.
- Qualifying Widow(er) With Dependent Child: If your spouse died in 2015, you can use
married filing jointly as your filing status for 2015 if you otherwise qualify to use that status.
The year of death is the last year for which you can file jointly with your deceased spouse.
- For more details and special rules on filing statuses, please visit the IRS website.
With the varying filing statuses clarified, it is rather important to reiterate that you only pay taxes on your
business earnings minus your business expenses, which results in what is referred to as your business
profit. Therefore, it is critical that you are also keeping track of all your business expenses
(Fiverr Workspace can help with that!).
These business expenses include everything that the IRS defines as an ordinary expense and a necessary expense.
Here’s a deeper look into each expense:
- An ordinary expense is one that is common and accepted in your trade or business.
- A necessary expense is one that is helpful and appropriate for your trade or business. An
expense does not have to be indispensable to be considered necessary.
Beyond that of ordinary and necessary expenses, the IRS also considers cost of goods sold, use of home,
use of car, subcontractor pay, retirement savings, rent, and insurance as tax deductible. Keep in mind that
the ordinary and necessary rule applies to these expenses as well. But most importantly you’re incurring
these expenses anyway – best to make sure you are writing them off and keeping your money! Make sure
it all factors into your tax calculations!
As mentioned above, the easiest and best way to lessen your tax burden as a freelancer is to file your
quarterly taxes. And naturally, you want to make sure you are saving as much money as deemed lawfully
appropriate. In order to begin calculating your quarterly taxes, you must start by estimating your adjusted
gross income and deductions for the year. Refer to the definitions above if you are uncertain about what
qualifies as your adjusted gross income or as tax deductible. Then identify your tax filing status according
to the filing statuses mentioned earlier. Pick the filing status that results in the least amount of money
owed. After having determined your filing status as well as your adjusted gross income and your
deductions, you are officially ready to do some tax calculations!
Now with your quarterly tax calculated and in hand, you are ready to start circling those calendar dates for
when you should deliver payment to the IRS. Check out the graph below for this year’s quarterly tax
|Fourth Quarter 2016
|October 1, 2016 – December 31, 2016
|January 20, 2017
|First Quarter 2017
|January 1, 2017 – March 31, 2017
|April 20, 2017
|Second Quarter 2017
|April 1, 2017 – June 31, 2017
|July 20, 2017
|Third Quarter 2017
|July 1, 2017 – September 30, 2017
|October 20, 2017
|Fourth Quarter 2017
|October 1, 2017 – December 31, 2017
|January 22, 2018
With the actual dates of the quarterly taxes determined, let’s quickly review the steps to take in order to
deliver payment. Simply visit the IRS Payments Gateway to pay your quarterly taxes online (Fiverr Workspace
can also remind you!)! Alternately, you may do one of the following:
- Mail your payment with payment voucher, Form 1040-ES
- Pay by phone or online (refer to Form 1040-ES instructions, pg 3)
As a best practice, make certain that your quarterly taxes are calculated accurately and match the
payments you made in the year prior. And here are answers to the most frequently asked questions
regarding quarterly taxes:
- You may have to pay a penalty for underpayment of estimated tax if you didn’t pay enough tax
throughout the year, either through withholding or by making estimated tax payments.
- You may be able to avoid or lower a penalty by annualizing your income and making unequal
payments if your income is received unevenly during the year.
- You want to estimate your income as accurately as you can to avoid penalties.
- You can pay your estimated taxes weekly, bi-weekly, monthly, etc. as long as you’ve paid
enough by the end of the quarter.
Overall, it is in your best interest to pay quarterly taxes by the dates listed. And by doing so, you’ll save
yourself money, time, and aggravation. To calculate you quarterly taxes click here or set aside 25 to 30
percent of every paycheck in a business savings account to make sure you ready to deliver the full amount
of tax calculated for your quarterly taxes. While tax calculating may not be a blast, the thoughtful
preparation, careful record keeping of expenses, and keen awareness about the consequences will surely
eliminate the stressors on your business and allow you to pave a path to freelancing success!