What is IRS Form 1040-ES? Is it useful for estimating taxes?

The tax system in the US works on a pay-as-you-go basis, so the IRS collects income taxes throughout the year via payroll. Ideally, if you are a W-2 employee, you automatically get your taxes withheld by your employer. However, as a freelancer, taxes aren’t a cakewalk. You’re your own employer, so you have to pay a bit extra in “self-employment tax” to contribute to Social Security and Medicare by making quarterly tax payments. These taxes are used to pay:

  • Federal Income tax
  • State income tax
  • Self-employment taxes
  • Social security
  • Medicaid/medicare

So, as a freelancer, you must make quarterly tax payments especially if you owe $1,000 or more in taxes when you file your annual return. It’s the same case with corporations that expect to owe at least $500 to the government.

However, under certain circumstances, you may not have to pay estimated taxes if you meet the following conditions:

  • You had no tax liability during the previous year
  • Your last tax return covered a whole year (12 months)
  • You were a U.S. citizen for the entire year

So, if you’re a self-employed individual or a gig worker, you most probably owe quarterly taxes. Quarterly tax due dates come around like clockwork, four times a year, but even for seasoned freelancers, remembering the exact deadline can get confusing.

The following table represents the quarterly tax due dates:

Payment Period Due Date
Sept. 1 – Dec. 31, 2021 January 18, 2022
Jan. 1 – March 31, 2022 April 18, 2022
April 1 – May 31, 2022 June 15, 2022
June 1 – Aug. 31, 2022 Sept. 15, 2022
Sept. 1 – Dec. 31, 2022 Jan. 16, 2023

If any of the above-mentioned due dates happen to fall on a Saturday, Sunday, or holiday that year, you can pay on the next business day. Also, if you file your taxes by January 31st, you can make the rest of your tax payments for the previous year.

As a freelancer, you need to calculate your quarterly taxes using the IRS’ Estimated Tax Worksheet found within Form 1040ES (for individuals and freelancers).

One of the most reasons to pay your quarterly estimated taxes is to avoid getting penalized. The penalty amount usually depends on how late you paid and the way much you underpaid. To avoid the underpayment penalty, you’ll make a choice from the subsequent approaches:

  • You can make estimated tax payments capable 100% of your previous year’s bill
  • You can make estimated tax payments adequate 90% of your current year’s tax

It may sound a bit complex, but if you expect to earn about the exact amount as you did last year, you’ll follow the primary approach, which is pretty simple. For the upcoming quarterly tax payment, you can take the amount of tax you paid on your previous year’s return, divide it by four, and you’ll get your quarterly estimated tax amount.

If you manage to earn more than you anticipated, you’ll be required to pay additional taxes when you file your annual tax return. However, you won’t be hit with a huge penalty.

However, there’s a catch— if your income drops by a significant amount, you won’t be able to make excessive payments that will end up being refunded to you at the end of the year.

If you go with the second approach by trying to estimate what you’ll owe in taxes for the current year – you ought to know that your odds of getting the precise numbers are near zero. After all, even if you’ve calculated your profit for this quarter, you don’t know what your profit will be next quarter.

It’s also important to keep in mind that the size of the penalty is comparatively small: about 3% for an entire year, so the penalty for underpaying by even $2,000 would be $100 or less. While the precise formula for determining the penalty is complicated, it is essentially based on the amount you underpaid and how many quarters you were late.

For freelancers, it is a task to arrange cash to pay for the quarterly taxes due to the unstable income. So it’s very important to plan for it and keep aside the amount that you owe.

Freelancers usually don’t take into account itemized deductions such as home office expenses, mortgages, charitable contributions, and more. The following represents some of the common tax deductions available for freelancers:

Rent: Any rent you pay for a property meant for conducting your business is deductible.

Utilities: You can deduct the business portion of your utility payments, including heat, electricity, gas, water, and sewage.

Contract Labor: You can deduct any wages paid towards contract labor from your taxes.

Credit Card Interest: Any bank or card payments you make using a business credit card are deductible.

Office Supplies: Any equipment or supplies you require to operate your business qualifies as a deductible expense.

To calculate your estimated taxes, you need to consider a few things: your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. When it comes to paying your taxes, it is always better to rely on calculation rather than estimation.

As mentioned before, if you are a freelancer, you can refer to the IRS’ Estimated Tax Worksheet found within Form 1040-ES (for individuals and freelancers) and Form 1120-W (for corporations) to figure out the estimated tax. The form will help you figure out the amount you’ll owe for the year, divide it by four (quarters), and pay in equal installments before the tax due dates.

Mulling over spreadsheets and keeping track of all of your bills and receipts may be an awfully hectic process. Here, automating your expenses is in your best interest. Apps like FlyFin can help ease your burden.

Flyfin’s Quarterly Tax Calculator is powered by A.I. and backed by CPAs. The A.I. scans through all your expenses and provides you with the most accurate quarterly tax amount. all the while helping you maximize your savings.

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