Benny’s Basics: Quarterly Taxes

You could read the information yourself, or you could get the benefit of Aaron Taube leading the way.

Step 1: For filing your federal quarterly taxes, you’ll first need to get a hold of IRS Form 1040-ES, which has all the information you need to estimate your taxes for the coming year. Make sure you find the form for 2015 and not an earlier year.

Step 2: Calculate your estimated earnings for the year. Make sure to take into account the fact that your customers may not all be settled up with you by the end of 2015. When in doubt, it’s probably good to err on the side of overestimating your projected earnings.

Step 3: Subtract your business expenses from how much you expect to earn, and plug your earnings into the self-employment tax and deduction worksheet.

Step 4: Once you have your estimated self-employment tax and the deduction you’ll be allowed to take, you can input that information into the estimated tax worksheet to find out what you will owe the federal government for the year. Mine came out to a little more than 25% of what I expected to make.

Step 5: You can choose to pay your quarterly taxes based on either your estimated taxes for the coming year, or on taxes you paid in the previous year. You’ll ultimately be stuck paying the same amount of money, but at least you have some flexibility in the scheduling.

Step 6: Use your estimated earnings to calculate your estimated state and local taxes. It’s different for every state, but living in New York City, I wound up having to pay about 8.5% of my estimated earnings.

Benny Tips:

Online Payments:  You can pay your Federal quarterly taxes online by using the Electronic Federal Tax Payment System. It’ll take about a week for the IRS to mail you a PIN number you’ll need to log in, so if you’re doing it this way make sure to plan ahead! Once you’ve gotten your PIN, this system will allow you to link your bank account to the site and pay your federal quarterly taxes directly to the IRS, without having to worry about dropping a check in the mail.

Quarterly Tax Schedule:  It’s called “quarterly” tax but the year isn’t broken up into even quarters and you may owe tax when you don’t expect to in 2015:

  • For the period January 1st to March 31st; quarterly taxes are due on April 15th
  • For April 1st to May 31st; your taxes are due June 15th
  • For June 1st to August 31st; your taxes are due September 15th
  • For September 1st to December 31st; your taxes are due January 15th, 2016

Quarterly Taxes: My First Time as a Freelancer

Do My Taxes Myself

[Credit: Broad City, Comedy Central]

If you’d prefer a shorter how-to, check out this Benny’s Basics with step-by-step instructions.

When I really get to thinking about it, filling out my first set of quarterly taxes as a freelancer is a pretty scary proposition.

In the roughly three months since I left my full-time job as a reporter at Business Insider, I’ve been living with an unfortunate bit of uncertainty as to how much money I actually have in my possession.

To date, I have kept this uncertainty from growing into crippling anxiety by employing the same technique I have used in the past to deal with various other money worries, which is to say that I have been Actively Not Thinking About It.

In any event, I now have to face the music and find out how much of the money I have made writing various corporate blogposts and sponsored content these past few months will go to the public good.

As I sit down to make these calculations, it occurs to me that the dollar amount of the resulting tax bill will essentially determine whether my not-overly-considered decision to take up freelancing was “a bold and daring move toward personal freedom” or “a switch to an economically unfeasible lifestyle made by the sort of financially illiterate doofus who took 15 months to sign up for Business Insider’s commuter tax benefits program.”

Thus far, I have been setting aside 30% of every check I have received for tax purposes, and a bill around this percentage would put my bank account in a pretty solid place, relative to where it was when I left my job. A bill of around 45% or (gasp) 50% would make me feel pretty silly about the whole thing.

First up, I need to pay my quarterly federal estimated taxes, which is essentially one-fourth of the money I expect to owe the U.S. government for all of 2015. To do this, I will have to guess how much money I will make in 2015, then use Form 1040-ES to take a crack at how much I will owe the U.S. government for the year.

The first thing the form asks me to do is to estimate the “income and profits subject to the self-employment tax,” which is essentially the amount of money I expect to make freelancing minus the amount of money I expect to pay for certain business expenses like my portion of the internet bill I split with my girlfriend and the $25.16 I give GoDaddy each year to continue hosting my website.

This part was pretty tough. I honestly have no idea how much money I will make freelancing this year, or even if I will still be self-employed when 2016 rolls around.

The other difficult thing is trying to figure out how to calculate how much I have made. As any freelancer knows, there are essentially two balances you need to keep tabs on: the value of the work you have performed (which you have some control over) and the value of the work you have actually been paid for (which you, uh, don’t really). So in the first quarter of this year, I was paid $6,370 for freelance work, but by the end of March, I was owed an addition $4,550 for work I had already completed. (EDITOR’S NOTE: There are two different methods of accounting that reflect this difference: accrual basis accounting and cash basis accounting. We’ll have more on this later!)

If you’re scoring at home, that’s the difference between a person who makes $25,000 a year and someone who makes $43,000 a year.

This calculation was made even more difficult by the fact that I have made progressively more money each of these first three months, so multiplying the 2015 earnings to date by 4 would probably (hopefully) wind up being significantly less than what I will actually make.

Instead, I chose to make my calculation as follows: I multiplied the value of the work I performed in my best month ($5,550) by 9 to account for what I will make in the final three quarters of the year and added it to the value of the work I performed during the first three months of this year ($10,920) to come up with a baseline of performing $60,870 worth of freelance writing in 2015.

And here is the part of the process where I just basically started making things up.

There is really no way for me to know for sure, but my hunch is that I will be able to continue increasing the amount of money I make each month as more and more prospective clients see my work out on the internet and hire me to write things for them. It is not entirely out of the question that, with some luck, I could wind up doing $70,000 worth of work this year

HOWEVER, the nature of freelance work is such that it would be an absolute miracle if I was paid all of the money I was owed by December 31, 2015. And so, I settled on a grand total of (drumroll, please) $65,000 in estimated earnings for 2015.

My thinking is that even if I don’t wind up making that much money, I will be better off overestimating and getting to keep more than I had expected than underestimating and needing to pay a ton of extra money on tax day.

My “business expenses” are minimal, so I didn’t factor them into my calculations. Even though I work from home, federal guidelines say you can’t write off your housing expenses unless your home has a dedicated space that you use exclusively for work. My workstation is also our kitchen table, so this is out of the question for me.

Next, it is finally on to filling out the “2015 Self-Employment Tax and Deduction Worksheet,” which is essentially a warmup to the our main event, at least for the federal taxes, the “2015 Estimated Tax Worksheet.”

Basically the self-employment tax worksheet has you plug in the amount of money you expect to make and then asks you to do a bunch of calculations (“multiply line 2 by 92.35%,” “multiply line 3 by 2.9%,” etc.) to figure out what your self employment tax is going to be.

And let me tell you something, reader, the IRS is not f***ing around with this self employment tax. Mine will be $9,183 for the year, roughly 14% of my estimated my earnings. And that’s on top of the other federal taxes, which came out to $8,320.76, for a total federal tax of $17,503.75. That’s more than a quarter of everything I expect to earn this year, and we haven’t even gotten to state taxes yet! I don’t think I would ever vote for a Republican, but I at least now understand why someone might.

Fortunately, the IRS allows you to choose whether you want to pay your quarterly taxes based a) on what you expect to have to pay this year or b) on what you paid last year. For instance, I paid $6,811 in taxes for 2014 when I was working at Business Insider, so the IRS would allow me to avoid a tax penalty by paying one quarter of that ($1,702) four times a year. Then, next April, I would owe them the remaining $10,692.75. Seeing as how I maybe did not save up as much money as I should have, I am going to mail the IRS a check for the minimum now ($1,702) and try to make sure I can pay the rest on Tax Day 2016.

If you like, you can also make your federal quarterly payments online using the Electronic Federal Tax Payment System. Once you sign up, it’ll take about a week for the IRS to mail you a PIN number you’ll need to log in. After you get it, you can link your bank account to the site and pay your federal quarterly taxes directly to the IRS, without having to worry about dropping a check in the mail.

My New York State taxes were fairly straightforward once I had figured out how I was going to estimate my 2015 earnings and gone through the process of filling out my federal forms.

All I had to do was plug my estimated $65,000 in to state tax form IT-205-1 and follow their steps for calculating my New York State and New York City taxes (each state, and sometimes municipality or city, has its own tax formula, so it’s important to find yours). I wound up with an estimate that I would need to pay $3,348 in state taxes and $1,960 in New York City taxes, the latter of which I feel like is a fairly steep price to pay to live in a place where it’s cold 5 months (sometimes more!) out of the year and they are often already charging you $10 for a pint of beer.

I also had to pay an additional $221, for the Metropolitan Commuter Transportation District, which is a tax levied on self-employed people who live in New York City or any of its surrounding suburbs.

As was the case with my federal taxes, I was given and accepted the offer to pay my quarterly estimate based on the state taxes I paid last year, which were a little bit lower than this year’s tally, but not drastically so.

On the whole, if I make $65,000 this year, I will have to pay roughly 34% of that back to the state, federal, and municipal governments. While that’s a little more than the 30% I had been stocking away, I don’t think it’s so much over my initial estimate that my lifestyle is unsustainable. Even if the self-employment tax is kind of a pain, my expectation is that paying it will be better than having a boss to answer to every day.

Thanks for reading, and may your tax filings be quick and painless! Be sure to check back in the coming weeks, when we tackle other bugaboos of freelance life like categorizing deductions, cash basis vs. accrual accounting and other fun.

*This post was written by Aaron Taube on behalf of Benny*