Set Your Estimated Taxes on Autopilot

By Argel Sabillo, Levee

Freelancers are all hustling to do one job: Make money. They are balancing the creative process with client expectations—the last thing on their minds is paying taxes. Consequently, many freelancers ignore the fact they are required to pay estimated taxes four times a year until tax time comes around and the tax bill adds up to thousands of dollars.

Avoid the headache and make your money work for you. Put your quarterly estimated taxes on autopilot so you can focus more on the creative side of your business.

Here’s how in three simple steps:

1. Find out if you even have to pay.
According to the IRS, if you earn self-employment income and your tax bill is going to be $1,000 or more, then you have to make estimated tax payments. Easy translation—if you profited over $7,100 in freelance income this year, then you are required to pay.

There is one exception. If you had $0 tax bill last year, are a U.S. citizen or resident for the whole year, and your prior tax year covered a 12-month period, then you’re off the hook from making quarterly estimated tax payments this year.

2. Estimate what you owe.
The IRS requires that you pay at least the 100 percent of last year’s tax bill or 90 percent of this year’s tax bill—the lower of the two—and evenly spread those payments over four quarters in order to avoid the underpayment penalty.

There are three ways to estimate your tax bill and they vary in accuracy.

You can set aside 25-35 percent of your freelance income toward estimated taxes in a separate bank account. If you underpaid your taxes, you’ll have a few hundred to cover it. If you overpaid, you’ll get a nice refund. You can then adjust for the next year until you save the right amount.

A little more precisely, you can estimate how much profit you expect to earn for the year and calculate your estimated income and self-employment taxes based on this number. Divide it by four and then pay an even amount quarterly. These payments might not reflect your actual earnings each quarter, but should be close to the end-of-year total.

Here’s an example. Say your annual freelance profit is $90,000 (column 3). Your annual tax bill is $26,776 (column 4). Your estimated tax bill would have been four equal payments of $6,692 (column 5).

Table 1-A.

Quarterly Profit Annual Profit Annual Tax Quarterly Tax Bill Running Total
1st Quarter $22,500 $90,000 $26,766 $6,692 $6,692
2nd Quarter $22,500 $90,000 $26,766 $6,692 $13,384
3rd Quarter $22,500 $90,000 $26,766 $6,692 $20,076
4th Quarter $22,500 $90,000 $26,766 $6,690 $26,766
Total $90,000        


Meanwhile, there’s a more complex and accurate strategy. Calculate your estimated tax bill every quarter based on your freelance earnings and expenses every month. Freelancers know — it’s feast for famine, and this strategy is ideal for uneven income streams.

Here’s how it works. Say your freelance profit is still $90,000 (column 2), but the range fluctuated between $60,000 and $100,000 (column 3). As a result, your estimated annual tax bill (column 4) and your quarterly estimated tax bill (column 5) also fluctuated. But the estimated taxes you owe (column 6) still add up to your final tax bill of $26,766.

Table 1-B.

Quarterly Profit Annual Profit Annual Tax Quarterly Tax Bill Running Total
1st Quarter $15,000 $60,000 $15,557 $3,889 $3,889
2nd Quarter $25,000 $80,000 $23,029 $7,625 $11,515
3rd Quarter $35,000 $100,000 $30,502 $11,362 $22,877
4th Quarter $15,000 $90,000 $26,766 $3,890 $26,766
Total $90,000        

Why take the complex approach? You get to keep more of your money in the first quarter.  To do this, you have to be diligent with
tracking your income and expenses.

If you aren’t using a tax app like Levee to automatically calculate your estimated taxes, you can use Form 1040-ES to calculate your bill manually using the moderate and complex approach.

3. Know how to pay.

You can pay the old-school way by sending a certified mail of Form 1040-ES along with a check or money order to the IRS. Or you can pay easily online through their payment portal, EFTPS. If you’re making equal payments and don’t want to miss the deadline, you can even set the payment dates to automatically debit your bank account. Here’s the important tax deadlines:

For the period Due date
1st Quarter Jan 1 – Mar 31 April 15th
2nd Quarter Apr 1 – May 31 June 15th
3rd Quarter Jun 1 – Aug 31 September 15th
4th Quarter Sep 1 – Dec 31 January 15th (following year)

You can also pay via mobile by downloading the
IRS2GO app.

Keep in mind that these tips are only for taking care of your federal tax bill. You have to take care of your tax bill with the state government where you do business. You can find links to your state’s tax office here.

So in three easy steps—made even easier by an app like Levee—you can put your quarterly estimated taxes on cruise control, make paying taxes a breeze, and keep more of your money. Download Levee now to start automating and get the first month free. 

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