Generally, the tax system in the United States is based on a system of paying your taxes as you earn your money. If you have a job, you will have taxes withheld as you earn it. If you are a self-employed freelancer, you may have to pay your income taxes and your self-employment taxes as you get paid for your work. You will do that through a system called estimated taxes. Also known as “quarterlies”, you make payments four times a year during the year as you earn the money. These payments do not constitute filing a tax form; they are simply payments that will be included as taxes paid when you do the tax form for the current year.

Not everyone has to pay quarterlies. Generally, if you owe less than $1000 on your taxes or if you didn’t earn any money the year before. you don’t have to.

What are the advantages of paying estimateds properly?

1. You will avoid the interest penalties that you may incur. You generally incur penalties if you haven’t paid estimateds at the same rate that you paid taxes the previous year. That means, if you owed $2000 the previous year and you paid $500 per quarter, you will avoid paying any interest when it comes time to file your taxes, if you owe less than $1000, or if you paid 90% of your current year. If your adjusted gross income was more than $150,000 you will have to have paid 110% of your previous year’s income taxes to avoid a penalty.
2. Perhaps more important than avoiding a penalty is the issue of having the money to pay your taxes in the first place. If you set aside a portion of everything you make as you make it, put this allocated amount into an online account and pay your quarterlies as they come due, you will do your taxes with most, if not all of your taxes, already paid. This is very different from someone who says: I’ll worry about taxes tomorrow. When tax time comes, they suddenly have a comparatively enormous amount to pay and all too often do not have the means to pay their taxes.

For those of you who might think that you should earn the interest rather than pay the government: perhaps that’s true. But what the IRS may charge you may be far in excess of what bank accounts are earning these days.

Though the dates may not make exact sense, federal estimates generally are due April 15, June 15, September 15, and January 15. Knowing that state and city taxes are deductible may be deductible on your federal taxes, you may want to pay your 4th quarterly state and city estimates by December 31 of the year in which you are working so that you can deduct that 12/31 payment on your current year’s taxes. Otherwise you will have to wait to the following year for the deduction.

People have different methods of putting aside for taxes and paying their quarterlies. The first method which is to pay quarterlies based on the previous year is the most common. Sometimes people who pay based on the previous year may want to do a draft of their taxes before the end of the year and adjust what they have to pay based on the current year’s income on the fourth quarter estimated payment.

Freelancers often have income that is unpredictable and irregular. Another method meets this common freelancer issue of roller coaster earnings. You might pay your estimateds based on the percentage of what you paid the previous year of your earnings. What this means in practice is that one year you might have $50,000 in freelance income (and $10000 in expenses) and your federal taxes and self-employment taxes are $8639. Your yardstick for your quarterlies for the next year is 8639/50000 or 17.2%. This means that for every dollar that comes in in one quarter the following year, you pay 17.2% into quarterlies. That way, you’ll pay more in a quarter where you earn more. You will pay less in a quarter where you earn less and have less to pay it with. While this method generally puts you in the ballpark of what your taxes will be the following year, if you earn a lot more or a lot less, you will owe more or less using this method.

Also, if you use this method, there may be additional interest; the reason: you won’t qualify for one of the normal exceptions available for getting out of interest. You can possibly get out of paying this interest on Form 2210 using the exception called the Annualized Income Installment Method. Unfortunately this method is complicated and time consuming.

The IRS has a worksheet to use to figure out what you should pay on your quarterlies.

You can pay your estimates by check or you can set up an electronic payment system payment on the IRS website.

Federal estimates are paid on Form 1040-ES to be found on the IRS website: www.IRS.gov