"I'm in deep with the IRS."
"We ended up owing $15,000 this year."
"I don't have that kind of money just laying around. How do I file an extension?"
Sound familiar? Maybe you're a freelancer. A consultant. An independent business person. Somehow, some way, you've got money coming in that isn't from a normal everyday W2 job.
One thing's for sure: you have to pay taxes on that.
Yep. Taxes. That thing you don't want to think about because other things are way more important, like actually running your business and bringing money in and buying groceries and cutting your toe nails.
Still, you have to pay them or the IRS gets cranky. Crankier than your two year old after a six hour car ride. Crankier than your cat is at the vet. Suffice to say, probably something you'd rather avoid.
It's your honor and duty as a citizen of the United States to pay as little as you can possibly get away with, but no less. As a business owner (because that's what you are, you lucky dog you) there are all kinds of tricks and deductions and things you can do to reduce what you owe, but that's a lot to think about and really that's why accountants exist and can charge so much.
The simplest thing you can do to avoid the IRS's ire is to pay what you paid last year.
Yep. It's that simple.
Look at your last Form 1040, find the line where it says "Total Tax" (line 63 on Form 1040, line 12 on 1040EZ), and pay that. Same with your state taxes, if you have state income tax.
Quarterly. Except not really.
Specifically, you'll divide up that amount from last year into four equal payments and send the IRS a check and a Form 1040ES (or pay online with EFTPS) on these dates:
- April 15
- June 15
- September 15
- January 15
If you notice, those are not equal time periods. The IRS likes to keep things interesting.
What if I'll make more this year than last year?
Awesome! High five! That's how you run a successful business.
Here's what I do:
- Set aside 30-40% of every invoice payment into a separate money market account.
- Every quarter, I pay the quarterly payment we figured out above from that money market account.
- At the end of the year, I send the IRS a check for whatever we owe on top of the quarterlies.
If you know how much you're going to be making you can do some math to figure it out and send in the extra on the quarterlies, but usually it's not worth it.
The percentage you set aside is going to depend a lot on your situation and location. For your first year it's safer to set aside 40% and then dial in the next year.
What if I'll make less?
No problem. If you know you're going to be making less, you can just reduce your quarterlies. Alternatively, you can just send the IRS some money every quarter. As long as you pay at least 90% of what you'll owe by the end of the year the IRS is happy.
But what if...
There there. It's ok. Taxes are complicated.
You still have to pay them.