Four Things You Need to Know About Filing Estimated Taxes
The gig economy continues to expand. Workers, who are freelancers or independent contractors, now number roughly 57 million, which is about half of the entire working population.
Gig workers need to understand their responsibility to the Internal Revenue Service. Without employers to withhold taxes from their paychecks, gig workers must calculate their own payments to the IRS.
Here are four things to know about filing estimated taxes:
1. Who needs to file
Gig workers who expect to owe $1,000 or more in taxes must file estimated taxes.
To pay estimated federal tax, you must use Form 1040-ES, Estimated Tax for Individuals.
2. When estimated payments are due
The year is divided into four payment periods. Estimated tax payments are due on the following dates unless they fall on a weekend or public holiday:
January 12 of the following year
3. How much you owe
Gig workers are at a disadvantage because they need to figure out what they should pay in taxes before they know what they will make in the coming tax year. The government expects you to calculate your future expected gross income, taxable income, taxes, deductions and credits for the year.
To get started, it can be helpful to turn to your prior year’s tax return. You can also use the worksheet included in Form 1040-ES to figure out your estimated taxes.
4. How to avoid a penalty
You will face an IRS penalty if you don’t pay enough tax for the year. However, if you pay an estimated tax that is at least 90% of your ultimate tax obligation or 100% of your prior year’s tax bill (whichever is smaller), you generally won’t get penalized.
If you estimated your earnings too high, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated tax for the next quarter. You want to estimate your income as accurately as you can to avoid penalties.
If you make your income unevenly during the year, you may be able to avoid or lower a tax penalty by annualizing your income and making unequal payments.