What You Need To Know About Estimated Taxes
At the beginning of every year, we get a debilitating case of the adultees as we start to prepare for filing our taxes. It's Uncle Sam's way of pointing and laughing at us, as countless questions flow through our minds: What are estimated taxes? Can I deduct my hamster? Can I just... not file? (The answer to that last one is a definite no.) Thinking about taxes gives me cramps, and there are still a million things I don't understand; but right now, we're going to focus on estimated taxes — something that we should all be familiar with, particularly those of us who do not have taxes withheld from our paychecks. (Note: I'm neither an accountant nor a CPA. Just someone who has paid a boatload in taxes over the years.)
"Estimated taxes" does not mean you get to randomly determine a ballpark figure of what you might owe. "Hmmmm... yes. My intuition tells me I will need to pay the United States government approximately $5, rounding up." That'd be nice, but no. Estimated taxes apply to any income you receive that isn't subject to withheld taxes. This is often the case if you're a freelancer, like me. I write stuff for people and then they send a big ol' check; but not so fast! No money has been removed from that check for taxes, which means I need to account for this money myself.
Translation: I need to save a chunk of that paycheck for later on. The alternative is what payroll employees experience, where taxes are typically removed from their paycheck before they receive it, and are automatically sent to the IRS. As a freelancer, though, you are solely responsible for your taxes in this case; and Uncle Sam isn't terribly happy if he doesn't get his cash.
You'll have to pay estimated taxes if your tax liability is $1,000 or more for the year; furthermore, this applies to not only self-employed people, but also to sole proprietors, corporations, S corporation shareholders, and partners. And here's another requirement: You don't just file once a year in April, like the rest of the world (although you do still file in April so as to report your total earnings for the year to the govenment). You're also required to file estimated tax payments four times a year, hence why so many of us refer to them as "quarterlies." Here's how it works:
• For income received Jan. 1 to March 31, the deadline to file your quarterly estimated taxes is April 15.• For income received April 1 to May 31, the deadline is June 16.• For income received June 1 to Aug. 31, the deadline is September 15.• For income received Sept. 1 to Dec. 31, the deadline is January 15 of the following year.
The IRS is fine with you if you take your estimated yearly income and divide it into quarters; that is often the easiest way.
The reason you're paying four times a year is because the government wants to get their money as you receive your income. If you were a payroll employee, they'd get their money every time you got a paycheck — so, pretty regularly. The same rule applies to anyone responsible for their own taxes.
Estimating the amount you'll owe has to do with understanding your estimated adjusted gross income, taxable income, and deductions. You should refer to Form 1040-ES to help you do this; tax software can also be a huge help, and indeed, when you file in April every year, it'll usually include a section geared towards figuring out what your estimated taxes should be based on what you expect to make in the upcoming year. I'm a relative moron when it comes to dealing with numbers, and even I'm able to successfully file through TurboTax, so seriously. Give it a shot.
To play it safe, though, you can always consult the advice of a professional accountant or CPA. That's the best way to make sure your finances are all taken care of — and be sure not to wait until the last minute!