When you start out as independent contractor or freelancer, taxes are likely not the first thing on your mind. However, most self-employed individuals do not have taxes taken out of their client payments, which can mean a large tax bill at tax time. To avoid this, freelancers and contractors should make quarterly payments to the IRS. This will also help the freelancer, self-employed individual, or contractor avoid a tax penalty that is imposed if you pay too little taxes throughout the year.
Your San Francisco tax preparer can help you set up quarterly payments to avoid these tax penalties. However, only some freelancers or independent contractors will be required to pay these quarterly bills. Kaufmann Advisors can help you determine whether you need to worry about quarterly payments and help you set up a payment plan if necessary.
If you are making money in your own business as an independent contractor, sole proprietor, or freelancer, then you are likely considered “self-employed.” Usually, self-employed individuals will need to file a yearly tax return and must pay estimated quarterly taxes.
If you expect to owe $1,000 or more in taxes, then you should be making quarterly tax payments. Failure to make these payments will result in a tax penalty. The IRS sets the penalty amount for each year, but it usually ranges between 6 and 8 percent. However, those who did not have to pay taxes in the previous year will not have to make quarterly payments, regardless of what you earned this year.
The amount of deductions and credits that you are allowed to take will obviously impact how much you will owe in taxes. If you know that you will be entitled to a large deduction, from paying student loan interest for example, then you may not need to pay quarterly tax payments.
There are special rules for fisherman, farmers, some household employees, and those who are considered higher-income taxpayers. If you fall under one of these categories, you should definitely consult with a San Francisco tax preparer before you file your return.
Form 1040-ES, Estimated Tax for Individuals, will help you determine how much you should be paying in quarterly estimated payments. It looks similar to the regular Form 1040, which most people use to file their annual tax return, but it will use the prior year’s taxes to help you determine how much your quarterly payments should be.
Estimated quarterly payments is not just for independent contractors, self-employed individuals or those who work as freelancers. Any type of income that is not subject to Social Security or Medicare payments could warrant a quarterly tax payment schedule. Other examples of this type of income include:
· Income from rental property
· Dividends
· Interest
· Alimony
How much your quarterly payments will be depends on your income from the previous year. Most people figure their quarterly payments for the following year right after they do their taxes each year. You can avoid underpayment of tax penalties by paying 90 percent of your total tax due for the current year or the same amount of tax that you paid in the prior year, whichever is less.
Quarterly payments usually start April 15, but there are some variations to the timing for payment depending on when your business actually earns money. Your Form 1040-ES has instructions and four numbered payment vouchers that you send in with the quarterly payments. The IRS has a strong interest in receiving this money, so they have tried to make paying these amounts relatively simple.
Even if you make quarterly payments, you must still file an annual tax return. You will fill out either the Schedule C or Schedule C-EZ to report your income and businesses expenses as usual. You will also fill out the Schedule SE to report your income for self-employment tax purposes, as you should every year that you have self-employment income.
The only difference in filing your annual tax return when you make quarterly payments is that your amount already paid in will increase on your Form 1040, lessening the amount of taxes that you will need to pay at the end of the year. There is a specific line on the Form 1040 where you will report this information.
If you did not make quarterly payments and you owe taxes and penalties, you should consider setting up a quarterly payment plan for next year. The tax professionals at Kaufmann Advisors can help you set this up so you can avoid a large tax bill or underpayment penalties at the start of the new year. Use the profile link below or click the Contact button to get started.
Simon Hase, CPA