Understanding Estimated Tax Payments for Freelancers and Contractors
Don’t want to get hit with IRS penalties this year?
Quarterly estimated tax payments are not optional for freelancers and contractors. In fact, they’re a requirement or else you’ll get slammed with penalties.
The issue:
Freelancers don’t understand estimated tax payments and penalties because they’re largely unfamiliar with the entire process.
Many assume that estimated taxes only apply to very high earners. But the truth is, anyone who expects to owe $1,000 or more at tax time needs to pay quarterly estimated taxes.
If you don’t make estimated payments…
The IRS will charge you a minimum 8% underpayment penalty. This is the highest penalty rate in over 10 years.
And get this —
73.3 million Americans freelance and most of them don’t understand how or when to pay quarterly estimated taxes.
What you’ll learn:
- What Are Estimated Tax Payments?
- Who Needs to Pay Quarterly Taxes?
- How to Calculate Your Estimated Tax Payments
- Payment Methods and Deadlines
- Common Mistakes That Cost You Money
What Are Estimated Tax Payments?
Estimated tax payments are quarterly payments you must send to the IRS to cover your estimated tax liability. It’s a way of paying your taxes in increments throughout the year instead of all at once.
Here’s the significance:
Employers automatically withhold income taxes from your paycheck and send them to the IRS for you. As a freelancer or contractor, this doesn’t happen. You’re responsible for these taxes on your own.
IRS estimated tax payments cover:
- Federal income tax
- Self-employment tax (Social Security and Medicare)
- Alternative minimum tax (if applicable)
Pretty simple, right? But most people make one of these big mistakes below…
Who Needs to Pay Quarterly Taxes?
If you’re self-employed or expect to owe at least $1,000 in taxes when you file your tax return, you must make estimated tax payments. It includes freelancers, independent contractors, sole proprietors, partners, S corporation shareholders, or anyone else who receives income that doesn’t have taxes withheld automatically.
But here’s a twist.
Even if you work a regular job and also have a side hustle or self-employed income, you might need to pay estimated taxes if your combined income results in owing $1,000 or more when filing taxes.
A good quarterly tax calculator can help you determine how much to pay each quarter based on your projected annual income and deductions.
How to Calculate Your Estimated Tax Payments
Calculating quarterly payments isn’t as complicated as it sounds. You have two options:
Method 1: Use last year’s tax return to pay 100% of your total tax liability from the previous year and divide by four. If your AGI was over $150,000, you pay 110% to avoid penalties.
Method 2: Make a projection for this year’s income, subtract any deductions or credits, calculate the tax, and then divide by four for quarterly payments.
The safe harbor rule protects you:
Pay 90% of this year’s tax liability or 100% (110% if AGI > $150,000) of last year’s and you’ll avoid penalties even if you end up underpaying slightly.
Most estimated tax payment calculators use one of these methods to calculate your quarterly due amounts.
Payment Methods and Deadlines
Here are the due dates for estimated tax payments in 2024:
- Q1 – April 15, 2024
- Q2 – June 17, 2024
- Q3 – September 16, 2024
- Q4 – January 15, 2025
Notice how the quarters aren’t 3 months?
The IRS has their own weird calendar for this that doesn’t make much sense, but these are the dates to memorize.
Payment methods:
Online through EFTPS: Free and lets you schedule payments ahead of time.
IRS Direct Pay: Direct from your bank account.
Phone: 1-888-PAY-1040, but it usually charges a fee.
Mail: Send a check with a payment voucher using Form 1040-ES.
Increase W-2 withholding: Ask your employer to withhold more so taxes cover your self-employment income.
Common Mistakes That Cost You Money
Mistake #1: Waiting Until Year-End to Pay
This is the big one. Paying all your taxes when you file your return will get you hit with a major penalty. The IRS wants their money spread out throughout the year, not at once.
Mistake #2: Not Accounting for Income Fluctuations
Freelancer income varies. If you win a big client that significantly increases your income, immediately recalculate your quarterly taxes.
Mistake #3: Forgetting Self-Employment Tax
Many freelancers only calculate the income tax portion and forget the 15.3% self-employment tax. This covers both Social Security and Medicare.
Mistake #4: Ignoring State Estimated Taxes
Most states also require quarterly estimated payments for state income tax if you owe. Check your state’s due dates too.
Mistake #5: Poor Record-Keeping
Track every payment made and keep documentation of your calculations. Prove payment amounts if the IRS questions you later.
Smart Tax Strategies
Track every expense. Home office, equipment, subscriptions, meals–anything business related lowers your taxable income.
Immediately set money aside. Transfer 25-30% of every payment to a separate savings account for taxes. This keeps the money separate so you don’t accidentally spend it.
Use retirement accounts. SEP-IRAS and Solo 401(k)s defer taxes while saving for retirement.
Pay more frequently. The IRS doesn’t care if it’s weekly, monthly, or quarterly as long as you’re caught up by the quarterly deadline.
Tech Tools That Help
There are some great modern estimated tax payments calculator tools that can do much of this work for you. Many will integrate with your accounting software to automatically track income and expenses.
Some apps will round up each payment and send a percentage into your savings account to avoid scrambling for funds at deadlines.
Wrapping Up Your Tax Game Plan
Estimated taxes don’t have to be a big scary thing if you know the rules and get organized. The trick is treating it like any other business expense–predictable, necessary, and manageable.
Key points to remember:
- Pay quarterly if you expect to owe $1,000+
- Use last year’s tax as a safe harbor
- Immediately set aside 25-30% for taxes
- Don’t forget self-employment tax
- Track expenses and keep good records
Missing estimated tax payments is a huge costly mistake for freelancers. But now you know better. Set up your system, get in the habit, and never get caught off guard by the IRS again.
Live the freedom of the freelance lifestyle but be a responsible, prepared professional who handles their taxes correctly. You’ll thank yourself later.
