Our previous blog entry covered freelancer tax tips, specifically the shitload of taxes you will owe in your journey as a freelancer. As we mentioned, the IRS requires that self-employed individuals pay quarterly estimated taxes to make up for the quarterly payments that are not being made by an employer. It can be very painful to discover that you have underpaid your estimated taxes, which is why we’re writing this post in the first person plural, because this definitely didn’t happen to us.
Remember that your estimated taxes cover not just your self-employment tax (i.e., twice the usual amount of FICA), but your income tax as well, and any other taxes on income that is not subject to withholding. In Cathy Keeps Books’s experience, there are two ways to figure estimated taxes. You can project your tax for the year, most likely by basing it on last year’s, and divide that into quarters. Or you can do a quarter-by-quarter calculation and remit a percentage of each quarter’s income to the feds. For instance, you already know you’ll be paying 15.3% of your income in self-employment tax (6.2% to Social Security plus 1.45% to Medicare, doubled). Add to that your best estimate of your income tax rate. If you think you’re going to be taxed at 20%, you’ll want to remit 15.3% + 20% = 35.3% of what you made in the quarter.
Once again, Cathy Keeps Books is just a regular person and this is not professional tax advice. But take it from us and estimate higher, not lower, to avoid a storm of emotion on April 14.