Do you pay estimated taxes as a freelancer?

July 18, 2012 1:48 PM

Do you pay estimated taxes as a freelancer?

Do you pay state, federal, maybe county taxes as a freelancer and if so, do you find it hard to keep track of what you ought to pay and how much you’ve paid to whom? How do you keep track? I've tried using Excel but I have multiple clients and when checks come in I often forget to enter them and then I have to look through bank statements at the end of the quarter, figure out how much I've been paid, try to estimate the correct percentage, it's a mess. Any suggestions? I probably ought to be using Quickbooks but I'm not.

posted by pallen123 to Work & Money (10 answers total)

Whoa, that's way more complicated than it has to be. Just use the safe harbor rules. Take your tax liability from last year and assume that's your tax liability this year (or add ten percent, if your income last year was over 150k), divide by four, make the payments every quarter...or upfront, if you have the cash on hand. There is no underpayment penalty if you use this rule, even if you do end up underpaying.
posted by phoenixy at 1:56 PM on July 18, 2012 [7 favorites]

I cheat and use an accountant. I would say you definitely want to be using something like Quickbooks*. Each year he provides me with a set of forms to tear off and the amount to include for state and federal taxes. It's based on last year's income for all freelance work and paid quarterly**. As a sanity check, I keep a Google Docs spreadsheet showing all income for the year (it helps when doing my books in Quickbooks) and a running total for the year. Next to the running total is a cell showing 30% of the total less any taxes I've paid this year. That gives me a decent idea of what I will or will not owe come April 15th.

It's a pretty convoluted system but it works for me. I track expenses by having a separate credit card that I only use for expenses and tie that into Quickbooks. Whenever I do my books, I also pull in all the credit card transfers to let the accountant know what the purchase was. If you work from home, make sure to track how much of your total square footage your home office comprises. If you don't (or don't always), you can write off a percentage of your car costs based on usage, so track milage, gas, maintenance.

* I use QB only because I know it will work for my accountant, but given 95% of the features aren't things I need and Intuit seems to higher untrained chimps to bang on keyboard, you might want to look at something like Freshbooks.

** Note that your estimated quarterlies are based on last year's income, but the amount due on April 15 is based on your current year's income. So you can wind up in a situation like I was my first year: because I started in October, I had very little income, so my quarterlies were about 1/10th of what I should have been paying, so I owed a large chunk in April.
posted by yerfatma at 1:57 PM on July 18, 2012

And there is a penalty for not paying quarterly estimated taxes (if in fact you owe them). I also recommend using a CPA. I've found that it's cheaper than H&R Block or anything like that.
posted by mattbucher at 2:12 PM on July 18, 2012

I pay federal because my state and county have no income tax

My accountant made me up a nice payment schedule based on my estimated income, which I follow. According to my accountant and mattbucher's link, the IRS doesn't particularly care if you pay in one big chunk at the quarter or pay weekly/bimonthly/etc., so long as you're paying as much as you owe each quarter.

If it is easier to pay your estimated taxes weekly, bi-weekly, monthly, etc. you can, as long as you have paid enough in by the end of the quarter. Using EFTPS, you can access a history of your payments, so you know how much and when you made your estimated tax payments.

The old way, which I still follow for additional gigs outside that projected income, was to figure my tax bracket and put away 30% of that the instant the check comes in. That way I don't have to do any of the things you do.
posted by Ghostride The Whip at 2:35 PM on July 18, 2012

I do exactly what Ghostride the Whip does. The second I get paid, 70% goes into one account for me and 30% goes into another account for the IRS. Then whenever a payment is due, I just pay everything that's in the IRS account. It's much easier than trying to calculate every single penny from different clients, etc.
posted by McPuppington the Third at 2:45 PM on July 18, 2012

Just to clarify my last sentence since I kind of mauled it, based on my tax bracket, I figured I'd need to put 30% away, so I do that the instant the check comes in.
posted by Ghostride The Whip at 3:11 PM on July 18, 2012

I had to do this for decades, and had to engage an accountant. In fact, I've never done my own taxes and I'm now on Social Security. He said, here's about 12 categories of expenses, drop your receipts into folders labeled with those categories (including "misc"), and at year's end I'll figure what your quarterly estimated payments should be for next year. It got complicated because I was also occasionally flipping houses in addition to freelance writing, and had rental property with a partner, and . . . well, it got complicated. But the answer was to find a reliable accountant. For a few hundred a year, it was cheap peace of mind. Freed me to concentrate on stuff I thought I was good at, like writing and design and carpentry, rather than floundering in pools of arithmetic (which I knew I was lousy at). I'm still helping that accountant with his boat payments, even though my tax/income/etc situation is a lot simpler. (He charges less now.)
posted by fivesavagepalms at 5:34 PM on July 18, 2012

One important question here - Do you work a 9-to-5 and do freelancing on the side, or do you do freelancing as your sole source of income?

This matters because the key threshold here comes at $1000 owed (as in, you actually need to write a check for that, not your total tax liability) come April. If your extra income won't put you over that, don't worry about it.

And if it will put you over, and you work a regular job aside from your contracting - Just have extra withholdings taken out of every check to keep you under that $1000 limit, and sleep easy without caring what goes where; your W2 will sort it all out for you at the end of the year.
posted by pla at 6:39 PM on July 18, 2012

Right, phoenixy makes a great point. You're trying to avoid penalties for underpayment.

Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.... However, if your income is received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments

So, split the difference between last year and figuring out what you're making per quarter this year? You're currently definitely over-working, I'd say—if there was a spreadsheet involved in my quarterly tax payment figures, I'd die.

I am not an accountant or a person who is naturally good with taxes.
posted by RJ Reynolds at 5:47 AM on July 19, 2012

I keep copies of all my invoices in a spreadsheet, mark which ones have been paid when a check arrives, and then do what my accountant tells me to do at tax time (which, currently, is paying estimated taxes quarterly.)

It sounds like the only thing wrong with your process is the "forgetting to keep track of checks when they come in" part. You don't need Quickbooks, you need to stack the paycheck envelopes on top of your keyboard and you're not allowed to open them until you have your spreadsheet ready.
posted by ook at 6:02 AM on July 19, 2012