Freelance writing can be very stressful. Some months new clients are beating down your door (well, email account). The next month, you’re scrambling to write grocery lists for a little bit of cash. It all comes and goes so fast and it’s tough to maintain a monthly rhythm.
Which is why when quarterly estimated taxes come along many freelancer writers just wave their hands in dismay and say they’ll handle it later. After all, with all that other nonsense going on – marketing, negotiating rates, and oh yeah, writing – how are you supposed to deal with things like taxes?
But ignoring quarterly estimated taxes (QETs) can be very costly when April rolls around. Since you haven’t been paying anything in income taxes up until that point, you’ll get hit with them all at once. Worse, there are often IRS penalties attached to skipping out on your quarterly tax payments, so get ready to shell out!
What are you talking about?
Let’s back up a minute. If you’re new to freelance writing you may not even know what these “quarterly estimated taxes” are, much less what to do about them.
The United States income tax is what’s known as a “pay as you go tax.” This means you’re supposed to pay your taxes throughout the year rather than all in one big chunk at the end. When you work at, say, an office job as a W-2 employee, taxes are automatically taken out of your paycheck each period. So you get what’s left of your paycheck and go on with your life. However, when you’re a freelancer writer (or any type of self-employed person earning your own income), tax money isn’t automatically taken out. It’s up to YOU to pay it in.
The way you do that is to send a payment to the IRS every quarter. Those are your QETs. They are an estimate of how much you owe to Uncle Sam based on how much money you made (among a few other things). One such payment – quarter 2 of 2012 - is coming up on June 15th, so make sure you get that one in on time! The other payments are due September 17th, January 15th of 2013, then next year’s first quarter payment is April 15, 2013.
What do I do?
So you’re a writer and you don’t want to deal with math. That’s fine, we understand – so right out of the gate we’ll tell you that Outright.com offers a handy quarterly estimated taxes estimate. Import your bank accounts, PayPal, and credit cards into your free Outright account, then head over to the Taxes tab to check out what you owe. (Keep in mind we can’t predict your tax credits – such as childcare or the earned income credit – so our estimate will err on the side of paying more and keeping you out of trouble with the IRS.)
Rather do it yourself? This can be a little tricky, but it’s doable. Have you ever filled out a tax form harder than a 1040EZ? Then you already have a solid idea what to do. Basically, you need to calculate all of your income and expenses so you have a good handle on exactly how much profit you’ve made this year. On that note, make sure you keep accurate records of all your receipts, bills, invoices, and other money coming in and out!
Alternatively, since freelance writing can be a feast or famine business, it may be a good idea to start from your 2011 tax return. Have a look at how much you owed in taxes for the year. If you pay in at least 90% of that amount in quarterly estimated taxes throughout this year, you’re safe from penalties. On the other hand, if you already know that this year is going to be much more profitable than last year, this might come back and bite you in April – when the remainder of any taxes owed (minus quarterly estimated taxes you’ve already paid in) come due.
For the budget minded freelancer, trying to save and pay up about a quarter of what you guesstimate you will end up owing in taxes for the entire year is the way to go to save yourself from a tax surprise in April.
Filing Quarterly Estimated Taxes
After you’ve figured out how much you owe, Google up a copy of 1040ES, the tax form specifically made for QETs, then send the completed form to your nearest IRS tax office. If you’d rather do it online, head over to the IRS’ payment system. One of the benefits of using this system is you can set it up to make automatic payments in the future, making your job and life much easier so you can get back to what you should be doing – running your freelance writing business!
And finally, if you are freelancing alongside a W-2 position, you may not have to worry about quarterly estimated taxes at all! The income tax your employer takes out of your check may very well cover your QETs. So if you have any questions at all about QETs, it’s a good idea to consult with an accountant or other financial professional.