As a freelancer, you've certainly heard the cliche be your own boss. With great power comes great responsibility is another cliche, and in this case it includes taxes.
For you, taxes aren't just a once-a-year headache. Self-employed individuals must pay estimated taxes four times a year.
The deal with quarterly taxes is that many freelancers skip estimated tax payment deadlines, which leads to hefty fines. To make sure this doesn't happen to you, here's everything you need to know about estimated taxes and the penalties for not paying.
Taxes in the US work on a pay-as-you-go basis, which means the IRS collects income tax throughout the year via your employer's payroll. If you're a W-2 employee, your employer automatically withholds your taxes, but if you're a freelancer, you'll have to do the math independently once every three months.
These quarterly estimated tax payments, also known as quarterly taxes, are required by the IRS if you owed $1,000 or more when you filed your last annual return. Similarly, corporations that expect to owe at least $500 to the government in annual taxes must pay quarterly taxes.
These estimated tax payments (reported on form 1040-ES) are due on a timeline.
Usually, the estimated tax due date falls on the fifteenth of April, June, September and January. But for the year 2022, the due dates are slightly different.
The table below represents the quarterly tax due dates for 2022.
Self-employed individuals have to pay quarterly estimated taxes if they expect to owe at least $1,000 in taxes.
Not all freelancers and independent contractors need to pay quarterly taxes. FlyFin's quarterly tax calculator estimates whether you owe quarterly taxes and if you do, how much.
Estimated payments also apply to taxpayers who earn money that isn't subject to withholding. That can happen if the money is being made via:
However, estimated tax payments are usually associated with freelancers and small business owners.
If you manage to pay and file your taxes on time, you need not worry about penalties, unless you underpay on your estimated taxes The IRS will charge you the underpayment penalty if you fail to pay your entire estimated tax amount.
The penalty amount fluctuates, changing every quarter, and is decided as per the current interest rate. The interest adds up on unpaid balance and dues and compounds daily from the tax return's due date (regardless of any extension), until you pay the entire balance.
The Internal Revenue Service has increased the interest rates for the calendar quarter beginning April 1, 2022.
The revised rates are as follows:
The IRS can slap you with this penalty, also known as an underpayment penalty, if you are unable to make the total estimated tax payments.
Underpayment penalty rate:
The IRS calculates the penalty based on:
The following table represents the conditions you'll have to meet based on your business's adjustable gross income (AGI) that'll help you resort to the safe harbor rules:
For example, if your gross income for the prior year was $50,000, and it increased to $100,000 for the current tax year, you can make your quarterly tax payments based on $75,000, and you won’t receive a penalty. But you will need to pay tax for the extra $25,000 as a lump sum on April 15.
It's not unusual for freelancers and self-employed individuals to earn loads of money in one quarter and very little the next. That can make estimated tax payments stressful.
The annualized income installment method can help make this situation easier. Using this method, you'll be able to figure out how much you are paying per quarter using Schedule AI. It can be found on page 3 of form 2210.
If you are able to prove that your underpayment was the result of a “reasonable cause” — such as a medical emergency or family death — you’ll most likely get a pass.
However, “willful neglect,” i.e., intentionally ignoring the payment, won't be acceptable by the IRS.
The IRS waives off underpayment penalties if you:
In order to request a waiver of penalty, you'll have to fill out Form 2210 and check the right box in Part II.
You'll have to submit the form along with a statement explaining why you weren't able to pay estimated taxes during the specific time period for which you are requesting the waiver.
You'll also need some documentation proving your reasons. Here are some examples of the documents you may attach as proof:
If you can’t arrange for funds, even if you know a deadline is approaching, don't wait until you can pay the whole amount. Try to pay as much as you are able by the deadline.
Even a partial payment lowers the penalty you’ll end up owing.
FlyFin uses A.I. to find every possible tax deduction in your business expenses and provides 24/7 CPA assistance. In addition, our CPAs ensure accurate tax filing, leaving no space for tax penalties.
The app also notifies you of upcoming tax filing deadlines, acting as an A.I.-powered alarm clock, so you never pay unnecessary penalties. Make sure to avoid future tax penalties with FlyFin.
FlyFin CPA Team
With a combined 150 years of experience, FlyFin's CPA tax team includes tax CPAs, IRS Enrolled Agents and other tax professionals, offering users the most comprehensive tax advice and preparation.