Estimated Taxes for Freelancers, part 3
April 8, 2009 by Allison Boyer
Filed under Jobs
I’m back for part 3 of talking about estimated taxes – you can (and should) read part 1 and part 2 first. Thanks, everyone, for sticking this out – I know the info can be a little dry by it’s definitely worth knowing! Let’s finish by talking about how to pay.
Image via sxc.hu.
What forms do I need?
You’ll enclose Form 1040-ES, which is an estimated tax voucher. You don’t need help filling this one out – all it is is your name, ssn, and amount you’re paying. Once you’ve done it your first year, they’ll automatically send them to you afterwards, preprinted. You don’t have to justify your estimates in any way or even sign anything. You’ll do that when you clear up everything at the end of the year (by April 15 of the following year).
Where do I send the check/forms?
That depends on where you live. Every quarter, you’ll actually be sending out three checks/forms – one for federal, one for state, and one for local. The address is NOT the same as the address where you send you income tax return every April.
Can/should I pay early if possible?
Only if it is convenient for you. You won’t get any special credit for doing so! However, if you only owe a very small amount, you may just want to pay with a single check so you don’t have to be bothered with dong it every quarter. For most people, it makes more sense to keep your money in a savings account where it is earning interest for you.
Do I have to pay taxes if am just doing this as a hobby?
Yes. Yes, yes yes. If you made money, even a small amount, you have to pay taxes. Yes, even if you don’t consider it a job. Yes, even if you never meant to make money. Yes. Estimated? Maybe. Check out part one. If you owe less than $1000 total, you may not have to pay estimates – just a lump sum by April 15.
Should I hire an accountant?
If you freelance enough to owe estimates? Yes. I can’t tell you how invaluable it is. You don’t need to have someone on call or anything, and you don’t need to pay thousands of dollars to get the job done. Just find a small, local accounting firm or even somewhere like H&R Block and have them do your taxes instead of trying to do them yourself. It’s worth the money; trust me.
Plus, they’ll be able to answer your questions better than I will be able to – but still, leave a comment or ask away if you want! I’m opening the floor and will do my best to answer questions (or ask my accountant friend and relay his message).
Hi. Perhaps you can clear up some confusion. I am married and got a business license – sole prop in Jan 09. I made $1600 in freelance income last year which we noted as hobby income on taxes, otherwise, as a stay-at-home mom, I have no income to report. Do I base my sole prop estimated taxes on the $1600 or do I have to base it on my husband’s income. I’m confused because the instructions say to use the previous year’s info. Thanks.
I’ve made about $9,000 this quarter but since this is my first time freelancing, I haven’t filed quarterly–I didn’t even know I was supposed to. Instead, I filed my taxes for last year. Can I file next quarter? or should I do it all at once next year? I estimate making no more than an additional $10-$15K the rest of the year, so a total of $25K-$30K I would say.
Great Article, especially for first time freelancers. I have a question about my situation. I was a full time employed and laid off November 2008. I was unemployed for five months and obtained work as a contractor in early April. I am a 1099 employee for now month to month. Eventually after a few months, I hope to be put on the staff as a full time employee. My question is since I only had unemployment checks for first quarter, I did not have any income to send in on April 15, 2008 for 2009 taxes? My income for April and May 2009 would be due 6/15/09. To be safe, should I just pay withholding and the SE tax monthly as I receive the income monthly until they either hire me full time (which I hope) or until they do not renew my contract? I am making $3,750 a month gross. How much should I send in to be safe? Thanks!
Ok, called my accountant friend on this one, since I have no experience with joint filing!
Everyone pays estimated taxes, essentially, because if you work for an employer they take it right out of your paycheck. So, your husband is actually “paying” his estimates every time he gets a paycheck, automatically. Even if he makes more/less money than last year, he’s paying in the right amount (if anything, you may get a refund at the end of the year or owe a very little amount – like you did this year when you filed for 2008).
So, you should just base your estimates on just YOUR income from last year – the $1600 since you didn’t have another job. For those of you out there who DID have another job and are moving to do freelancing full time, you’ll want to base your estimates on the TOTAL income you made. You’ll avoid penalties if you pay 100% based on last year.
Of course, if you expect to make a lot more money than last year, you may want to pay in closer to the amount that will actually be due so that you don’t have a huge lump sum to pay at the end of the year. (see the above post)
Hope that clears things up! I really recommend talking to a CPA if you’re still unsure about things.
I’ll try to be as clear as possible, but it gets a little confusing. Hope this helps:
You already filed your taxes for last year, awesome! That’s done and out of the way and you were right to do that. There are actually TWO sets of taxes due by April 15 – the 2008 ones you filed AND 2009 quarter 1 estimated taxes, which is where the $9000 comes into play.
Officially, your estimates for that $9000 are due by April 15. That’s the first quarter due date. You can either pay at least 90% of what you owe on that amount or 100% on what you made in last year in total (divided by 4, since you’re paying quarterly). If you have (or had) another job, it gets a little more complicated to understand. I’ll try to break it down:
- If you moved from another job to doing freelancing as your only source of income, pay 100% on what you made last year in total, divided by four (or 90% of what you made this year so far).
- If you moved from another job and part time freelancing to freelancing as your only source of income, the same applies – pay 100% of what you made last year in total divided by 4, as a freelancer AND as an employee (or, again, 90% of what you made this year so far).
- If you moved from absolutely NO income last year to freelancing, you actually don’t HAVE to pay anything, since you made nothing last year – but you can (see the above post).
- If you moved from a full- or part-time job last year to freelancing AND a full- or part-time job this year…it’s even more complicated. Figure out the total amount you expect to make this year as an employee (NOT freelancing). There’s already “estimated taxes” being taken out of your check every week. Subtract the amount you expect to make from the amount you made last year, in total (your job plus any freelancing work). That’s the total you should pay on – OR, again, 90% of what you made this year already. If the number is negative or 0, you don’t have to have in anything (but you can; again, see above).
You aren’t really “filing” when you pay quarterlies. You’re just paying in a little so that this time next year, filing for 2009 is easier. If you haven’t budgeted to pay your estimated taxes by April 15, just pay them as soon as you can, and then keep up with them the other three quarters. You’ll get a tiny penalty for being late, but it really isn’t much at all – a few dollars. As a comparison, if you wait to pay everything until this time next year, you’ll pay hundreds in penalties.
Feel free to ask for clarification if you need it – I know this is all really confusing.
Thanks for stopping by, Ricky! I hope I can answer your questions.
First, there is no such thing as a 1099 employee. If you’re using form 1099, you are a contractor and NOT an employee. I’m only saying this because no matter how good of a job you do, they may never hire you to be on staff full time or they may continue to keep you as a contractor, even if you are doing 40 hours of work a week for them. I know you probably realize this, but a lot of people don’t – so I hope everyone else is listening! NEVER count on a freelance job becoming (or staying) full-time!
If you didn’t earn anything before April 15, you’re right – you don’t owe anything for the first quarter. However, keep in mind that you may want to fill out the proper documentation forms at the end of the year showing that no income came during quarter one. Otherwise, it looks like all of your freelancing income was spread out over 12 months but you just didn’t pay it for the first quarter.
You should not pay anything monthly. That will actually just be really confusing, and to be honest, I’m not sure that the IRS even accepts monthly payments. You should pay quarterly, even if you think they may hire you as a staff employee in just one or two months. Let’s say that you begin working for them on payroll on May 15. On June 15, you’d send in estimated taxes for everything you made up until you became staff, and after that, you don’t have to worry about it.
Again don’t do it monthly. You still need to do it quarterly, knowing that if you do get hired as staff, you’ll only be paying estimateds on the percentage you earned while you were a contractor. If it is more convenient and easier to figure out for you, start up a saving account for yourself and pay your taxes into that monthly. That way, at the end of each quarter, you’ll have exactly the amount you need to mail to Mr. IRS.
Now for the big question – how much. That’s going to depend on where you live. For federal taxes, Money Chimp’s tax bracket calculator (http://www.moneychimp.com/features/tax_brackets.htm) is really helpful. For example, for you at $3750 a month starting in Aprilish, I plugged in an annual income of $34,000 – you’ll own 4,688 for the year (if you file as single). State rates vary, and so do local rates. Here’s a list of state rates: http://www.taxfoundation.org/taxdata/show/228.html. It really starts to add up. Personally, I usually think to myself that about one third of my income is going to taxes. Where I live, that’s a little high, but it isn’t far off.
To be completely safe, talk to an accountant and come up with a plan for paying you federal, state, and local estimates. If nothing else, at least send in your best guess. The penalties for being a tiny bit off really aren’t that bad. You may owe a few bucks at the end of the year, but that’s much better than owing everything PLUS late fees!