Indianapolis Web Design Blog

5 Things I Wish I Had Known About Freelance Taxes: Part 3

Estimated taxes are like Satan’s way of giving freelancers a nice birthday gift, only instead of a gift it’s a bowl of scorpions sprinkled with toxic waste. And it’s your birthday four times per year.

The U.S. tax system is a “pay-as-you-go” system. This means that we never owe them too much, since they take it from us on a regular basis. Since freelancers don’t have an employer deducting taxes every week, we have to send in what is called the “Estimated Tax” four times per year.

So how much should you pay?
The amount of taxes you pay is based off of what you made last year. This is called the “Annualized Income Installment Method” and applies for most freelancers because of the fact that the money you make is not received evenly. From the IRS website:

If you do not receive your income evenly throughout the year (for example, your income from a repair shop you operate is much larger in the summer than it is during the rest of the year), your required estimated tax payment for one or more periods may be less than the amount figured using the regular installment method.

They have forms with instructions that will help you with the calculations. This means that if you make more during the current tax year that you did last year, you will owe more taxes when April comes around, even if you make your four estimated tax payments. You should definitely be prepared for this. If you make less than you did last year and you overpay, then they’ll owe you money and you’ll get a refund.

You definitely want to pay enough, because you will pay a fine if you don’t. As with all things related to our lovely IRS, It’s much better to pay too much that too little.

When should you pay your estimated taxes?
According to the IRS:

1. April 15th
2. June 15th
3. September 15th
4. and January 15th of the next calendar year.

If your fiscal year doesn’t for some reason start on January 1st, then this is your payment schedule:

1. The 15th day of the 4th month of your fiscal year,
2. The 15th day of the 6th month of your fiscal year,
3. The 15th day of the 9th month of your fiscal year, and
4. The 15th day of the 1st month after the end of your fiscal year.

If you have your taxes prepared for you as I recommend, then your tax preparer will provide you with all of this information. They’ll leave you with the right forms and amounts, ready to go when the due dates roll around.
Yet another good reason to have your taxes done by a professional.

This blog post is not intended to be specific tax advice. For tax advice, go consult a professional.

• Read Part 1
• Read Part 2
• Read Part 4

This entry was posted on Wednesday, February 7th, 2007 at 6:40 pm and is filed under Freelance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.