If you’re self-employed or earn income as an independent contractor, then you have to handle your own taxes. What does this mean exactly? When you begin earning money as an independent contractor, you essentially become a business-of-one. And just how a company will withhold money from an employee’s paycheck to send to the IRS, you need to take out your own taxes from the money you earn.
Who needs to pay quarterly taxes?
Here’s a general rule-of-thumb for determining if you should be paying taxes quarterly:
If you expect to owe more than $1,000 in taxes for the year for your freelance or contracting work (which amounts to around $3,000 or more in profit) then you may need to pay quarterly taxes.
What about year-end 1099 taxes?
If you’ve been paying quarterly taxes and by the end of the year it turns out you’ve overpaid, then you’ll get a refund! Conversely, if you’ve underpaid you’ll be able to balance up in April.
What do you need to track in order to pay?
You’ll need to diligently track and collect earnings (in the form of paystubs, or invoices) and business type (if you do different types of labor). In order to lower how much you owe, it’s important to also track expenses. Common expenses include anything that is “ordinary and necessary for your business.” Common examples include:
- Home office expenses
- Meals with clients
- Software for business (e.g. Microsoft Office)
As a safe rule of thumb, put aside 30% of each paycheck so you’ll be able to afford quarterly taxes when the time comes.
How do you pay?
Here are the forms you’ll need in order to calculate and file your quarterly taxes:
Schedule C: Is where you can record your 1099 income plus any related expenses. This profit is then subject to self-employment taxes, federal income tax, and state income tax. The Schedule C isn’t required for paying quarterly but it’s helpful to have.
1040-ES: Is the worksheet for calculating quarterly taxes.
When do you pay?
Here are the 2016 deadlines:
How do you submit a payment?
You have two ways to send in your payment:
- Electronic: Payment must be submitted by 8pm Eastern then day before the due date, via a system called EFTPS.gov.
- Physical Mail: Postmark the payment on or before the due date. First, print and fill out a 1040-ES form for the corresponding quarter (for Sept. 15th that would be the Q3 Voucher). Then write a check to the United States Treasury for however much you owe. Finally send it to your nearest IRS mail center.
What happens if you don’t pay?
If you don’t pay quarterly when you should, you could face a penalty. Typically, you’ll pay a 6-8% penalty on the amount you underpaid. So if you made $10,000, owe $2,000 in taxes, and didn’t pay quarterly taxes, you might be subject to a penalty of 6% of the $2,000 underpayment, which is $120 — yikes!