As the pandemic has caused financial uncertainty, many have hopped onto the freelancer or contractor train, a.k.a 1099 employee, a.k.a self-employed, a.k.a I’m hustling as much as I can to save myself from the economic crisis. If you’re expecting to owe $1000 after subtracting withholding and refundable credits, you will need to pay estimated quarterly taxes throughout the year. Navigating these financial waters can be quite intimidating, so if you are filing as an individual, here are a few tips to help you through the basics.
1. Put Money Aside from your Net Profit for Tax Purposes
If you receive a monthly or bi-monthly invoice, it’s recommended to put aside at least 30% for taxes. Check out the updated tax rate schedule for 2020 to confirm your tax bracket. If your net profit does not exceed $163,300, then the max federal tax percentage is 24%, however, give yourself wiggle room for your state income tax. As a self-employed individual, it’s crucial to keep funds for quarterly tax payments based on your net profit. What is the net profit you ask? Net profit is the total once you have deducted all expenses from the gross gain or pre-taxed income.
2. Know the quarterly tax payment deadlines
There are four dates you should know; April 15, July 15 (originally June 15, but extended due to COVID-19), September 15, and final payment due by January 15 of the following year. Save these dates in your calendar, put sticky notes on your pet, and do what you must remember. You may be charged penalties if you pay late, even if you may receive a refund at the end of the year.
3. How to calculate quarterly payments
Now here is the fun part, calculating your quarterly tax payments! Thankfully, the IRS does provide guidelines by filling out the 1040-ES form. If you’re new to deducting expenses, the Schedule C Form & Instructions are forms that provide information on what constitutes a “deduction.” It even provides helpful resources if you are part of the sharing economy. I managed the list of deductions by creating a monthly spreadsheet with the deductions that apply to me. If I added the item to the Schedule C form, I would keep a copy of the receipt. For any expenses I’m uncertain of, I consult with a CPA.
4. When to change tax payments or withholdings
If throughout the year, you have a fantastic life event that takes place, such as getting married, this does change your tax payments or withholding. The life event can create an impact on your taxes, so please remain updated on all tax withholding information.
5. How to make quarterly payments
There are five options to submit your payment through the IRS website. If you live in a state with income tax, check with your local office to see which options are available to you. For example, in California, residents are required to submit payments online following a specific installment plan.
Having to pay quarterly taxes as a self-employed individual can be overwhelming, but you can get through it! Feel free to view the FAQ page from the IRS for more information on Estimated Tax Payments.
If you still have further questions, we highly suggest confirming with a Certified Public Accountant.
