Self-Employed? Don’t Get Penalized!

Freelancers and consultants have it made, right? They have control of their own schedule, working from home — or anywhere else — and working only when they feel like it. They’re fully autonomous, deciding when to work and when to play. As long as they meet client deadlines, they’re good. That lifestyle is one that many people who punch a time clock (real or theoretical) envy.

But there are aspects of self-employment that aren’t so rosy. Self-employed workers have to purchase their own medical insurance. They have to manage the operational aspects of their business along with doing the work. And they have to set aside enough money to pay taxes when it’s time. 

The Self-Employed Must Be Self-Sufficient

No one takes federal or state tax withholdings from a freelancer’s paycheck. That means they have to guess what they’ll earn each year and estimate their tax liability. The easiest way to manage all this is with the help of a trusted accountant who can review past years’ earnings and provide an estimate of what they’ll earn and owe for the current year. Their accountant can also set them up with estimated tax payment vouchers to help them stay on track.

Estimated taxes are something self-employed workers often aren’t that familiar with. Many look at them more as a suggestion rather than a requirement. But the reality is that the IRS expects workers to pay taxes throughout the year as money is earned. That’s why employers take money out of employees’ paychecks each pay period. That money goes to the IRS and is then reconciled at tax time the following year. 

The IRS Wants Its Money

If you’re self-employed, you need to know that the IRS expects you to pay as you go, too, and that’s where estimated tax payments come into play. Estimated tax payments are made quarterly, which can be a good thing. They help you stay ahead of your tax liability and avoid a big bill at tax time. However, many freelancers, contractors, and new business owners have a hard time making estimated tax payments.

Here’s why it’s so important to keep on top of this. The IRS penalizes you for not making estimated tax payments. The penalty is calculated quarterly based on the interest rate set by the Federal Reserve. That means the penalty fluctuates from quarter to quarter and year to year. In recent years, we’ve enjoyed low interest rates that have spurred people to purchase new homes, cars, and other big-ticket items. Now, however, the landscape has changed.

Beware of Rising Interest Rates

With interest rates going up, the penalty for not making estimated tax payments rose to 8% on October 1, 2023. That’s a considerable increase over the low of 3% in early 2021 when interest rates hovered near zero. If interest rates continue to rise, so will the penalty for not making estimated tax payments. Industry experts expect freelancers and contract workers to be the hardest hit by this increase.

If you’re self-employed, make sure you’re keeping up with your estimated tax payments, which are due for the current tax year on April 15 (1st quarter), June 15 (2nd quarter), September 15 (3rd quarter) and January 15 of the following year (4th quarter). Your accountant can help you estimate your annual tax liability and figure out how much your estimated tax payments should be to avoid being assessed a penalty.

Adams Accounting Serves the Self-Employed

The professionals at Adams Accounting Solutions specialize in helping self-employed workers with all tax-related issues, including estimated tax payments. We’re here to help, whether you’re preparing your taxes or just have a tax-related question. Give us a call to schedule a consultation today. Let’s make sure you’re not hit with a hefty penalty for not paying your estimated taxes this year!