HOW DO FREELANCERS AND SOLE PROPRIETORS PAY THEIR TAXES?
The IRS is not too keen on waiting for “their” money. If you’re earning money throughout the year, they expect to receive your tax payments as you earn your income, not just at the end of the year when you actually file your tax return. Whether you are self-employed, an employee on a job, or an investor, you’re expected to pay as you go. This is referred to as a “pay as you go” system. It’s really easy to comply if you’re an employee – your employer simply withholds taxes from each paycheck. But what if you are a freelancer or a sole proprietor? No problem. You simply send your tax payments directly to the IRS in the form of estimated tax payments – normally paid on a quarterly basis.
Here are 3 steps for successfully determining how much, when and where to pay your estimated tax payments:
- How much to pay. To gauge how much you need to send in for the year, you can use your previous year’s income and tax liability figures. Every quarter you’ll want to send in at least 25% of last year’s tax liability (for 2016, the tax liability is found on line 63 on page 2 of the 1040). To be even more precise, it may be worth your while to engage an Enrolled Agent or CPA to do income and tax projections for you. This takes into account all anticipated income, credit and deductions you may be entitled to take.
- When to pay. For estimated tax purposed, the year is divided into 4 payment periods (4 quarters). To prevent any penalties from being assessed, you should send in your quarterly tax payment by the following due dates:
- By April 15th (for Jan 1 – Mar 31)
- By June 15th (for Apr 1 – May 31)
- By September 15th (for Jun 1 – Aug 31)
- By January 15th, of the following year (for Sep 1 – Dec 31)
- Where to pay. It’s actually pretty easy to pay your quarterly estimated taxes. Here are 3 simple options:
- Mail in your quarterly voucher (accompanied by a check, money order, cashier’s check). The quarterly voucher is called Form 1040-ES. Use this link to determine the appropriate IRS mailing address: https://www.irs.gov/uac/where-to-file-addresses-for-taxpayers-and-tax-professionals-filing-form-1040-es
- Pay online by going to: https://www.irs.gov/payments/direct-pay. Select estimated tax payments and the period that you’re paying for (this is my favorite option!)
- Pay online using the Electronic Federal Tax Payment System (EFTPS): https://www.eftps.com/eftps/
If you end up overpaying on your estimated taxes, don’t worry. You’ll receive a refund when you file your full tax return. However, waiting until the end of the year to pay estimated taxes is a bad idea. You open yourself up to penalties for all 4 quarter’s of late payments. If you miss a deadline, go ahead and make the payment as soon as you remember. The longer you wait to pay your taxes, the more it’s going to cost you. If you need help, call our office at 704-298-1040. We are here to help!