When you work for an employer, tax is withheld from every paycheck. When you are self-employed, nobody withholds for you. Instead, the tax system expects you to pay as you earn, through quarterly estimated tax payments. Understanding this early prevents unpleasant surprises.
Who generally needs to make estimated payments
Freelancers, independent contractors, sole proprietors, partners, and owners of pass-through businesses, as well as people with significant investment, rental, or other income not subject to withholding, may need to pay estimated tax. As a general rule, if you expect to owe a meaningful amount of tax when you file, estimated payments are likely to apply.
What you are paying for
- Income tax on your net business income and other income.
- Self-employment tax, which covers Social Security and Medicare for self-employed individuals.
Typical due dates
Federal estimated payments are generally due on or about April 15, June 15, September 15, and January 15. When a date falls on a weekend or holiday it moves to the next business day, and dates can vary, so always confirm for the current year. Many states have their own estimated tax requirements.
How much should you pay?
There are common “safe harbor” approaches to help you avoid an underpayment penalty. In general, you may be protected if you pay at least a required percentage of either your current-year tax or your prior-year tax (the percentage is higher for higher earners). Your income, however, may be uneven through the year, so you may prefer to calculate based on actual earnings. The right approach depends on your situation.
Practical habits that make it easier
- Set money aside every time you are paid. Many freelancers move a set percentage into a separate savings account.
- Track income and expenses monthly. You cannot estimate accurately from a shoebox of receipts in April.
- Revisit your estimate when income changes. A big contract or a slow quarter should change your payments.
- Keep proof of payment. Save confirmations for each payment.
What happens if you underpay
Falling short can result in an underpayment penalty and interest, in addition to the balance due when you file. If you realize you have underpaid, it is usually better to catch up promptly than to wait.
Where we can help
We help self-employed clients estimate their payments, build a simple set-aside routine, and review their numbers during the year. Contact us to talk about your situation.
General information only. This article is educational and is not tax, legal, or financial advice. Tax rules change and outcomes depend on your individual facts. Please consult a qualified professional about your situation.