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Yes, Virginia, You Do Have to Pay Estimated Taxes in January

Paying taxes at the start of the new year – sounds crazy right? This is the ugly truth for freelancers, Airbnb hosts, rideshare drivers, or anyone else earning 1099 income. If you earn self-employment income, you’re expected to stroke Uncle Sam a check four times a year for quarterly estimated tax payments. Not completely sure what we’re talking about? Don’t worry, you’re not alone – over two thirds of freelancers don’t understand their self-employment tax obligation. With the quarterly estimate just around the corner, January 17 to be exact, we put together a quick run-down on quarterly estimated tax payments to answer any questions you may have about paying your quarterlies.

Who has to pay? Well, pretty much everybody. Here in the United States we use what’s called a “pay-as-you-go” system for collecting income tax. This means that you’re expected to pay taxes on the income that you earn throughout the year. This is something that is often overlooked when working for an employer as they automatically withhold money for taxes and pay the IRS on your behalf. When you’re self-employed, however, there is no one there to withhold your money for you or pay the IRS – it’s all on you to make sure Uncle Sam is getting his money. There are a few exceptions, but if you’re expecting to owe over $1,000 in self-employment taxes this year, you need to be paying quarterly estimated taxes.

Do I HAVE to pay estimated taxes? Neglecting to pay quarterly estimated taxes can get expensive. If you do miss a payment, you’ll be charged a penalty and have to pay interest on the unpaid balance of the missed payment. While missing one payment may not break the bank, missing multiple quarterly estimates can add up quickly. Not to mention, not keeping up with quarterlies often you’re a lot more likely to be blindsided by a large tax bill at the end of the year that you’re not prepared to pay.

How much should I expect to pay and how do I get your payments to the IRS? There are a few ways to calculate how much you should be paying and to actually pay your quarterly payments. The method that you should use depends on a few things about your work. If you earned 1099 income and paid self-employment taxes last year, you can base your quarterly payments off of the amount you paid last year. The IRS Form 1040-ES is the go-to resource for calculating what you need to be setting aside for this year’s payments. If your work is fairly steady, you can always refer to what you paid last year. Planning to pay 100-110 percent of what you paid last year is good rule of thumb to avoid underpayment.
If this is the first year you’ve earned 1099 income, or if your work is seasonal, you can use what the IRS calls the annualized payment method. This simply means that you pay the IRS a percentage of that particular quarter’s earnings instead of a flat rate for each quarter of the year. To use the annualized payment method, you’ll want to use the IRS Form 2210.

What if I over- or under-estimate? No worries – the IRS will be sure to let you know. If you’re lucky enough to have made more money than what you estimated from the year prior, you’ll get a note from the IRS letting you know that you underpaid for the year. If you have an off-year and overestimated your quarterly payments, you will receive a refund at the end of the year or you can just apply that amount to the next year’s tax obligation.

When are quarterly tax payments due? Remember to mark these dates on your calendar to avoid having to pay those pesky penalties from the IRS.
• For income earned between Jan. 1 and March 31, estimated tax is due April 17.
• For income earned between April 1 and May 31, estimated tax is due June 15.
• For income earned between June 1 and Aug. 31, estimated tax is due Sept. 15.
• And for income earned between Sept. 1 and Dec. 31, estimated tax is due Jan. 15.

How can I make handling quarterlies easier? Having to pay the government four times a year sucks, there’s no way around that. However, there are a few really simple ways you can take the night sweats out of quarterly taxes. The key to getting your payments in on time is to make sure that you’re keeping up with how much you owe on the year each time you earn 1099 income. This probably sounds a little tedious to say the least – that’s why you may want to consider having a tool to help, like Painless1099. Painless1099’s smart bank accounts automatically calculate and withhold the money you need to be saving for taxes every time you get paid and then send what’s safe for you to spend directly to your personal checking account. That way, even if quarterlies do sneak up on you, you’ll know you have enough saved to cover your bill and you can send that money to the IRS straight from your Painless1099 account. You even get friendly reminders when your payments are due to make sure you don’t completely forget!

Thank you to our friends at Painless 1099 for this excellent guest post!

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Picture of Jonathan Medows, CPA

Jonathan Medows, CPA

Jonathan Medows is a certified public accountant licensed in New York, New Jersey, Maryland, and Pennsylvania. He is also a recognized expert in taxation for freelancers and the self-employed—often tapped for his expert knowledge and perspective on self-employment taxation by national and regional publications such as The New York Post, BusinessWeek, Forbes taxation blog, WebCPA, CPA Practice Advisor, and others. You can read some of Jonathan’s press coverage here.

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