The Guide to Freelance Quarterly Taxes From Our Friends at Bench
This content is brought to you by our partners at Bench, an all-in-one tax and bookkeeping solution for independents.
We’re thrilled to partner with so many great companies and organizations working to bring tools and resources to independents. In addition to the perks and benefits that we’ve lined up across healthcare, legal, and financial services, we’re sharing helpful blog content in collaboration with our partners to help you run your studio as smoothly as possible.
In this installment, we’re diving into quarterly estimated taxes to spotlight our partner Bench, an all-in-one tax and bookkeeping solution for independents. Wethos users receive 30% off their first three months with Bench. Sign in or sign up to redeem!
So, what are quarterly estimated payments?
Dealing with quarterly estimated tax payments is just part of being in business for yourself. But setting them up for the first time can be overwhelming. Here’s the easy way to start making quarterly estimated payments.
If you’re self-employed, the IRS generally requires you to pay your taxes in quarterly installments over the course of the year, rather than as a lump sum at the end.
Since it’s impossible to know exactly how much taxable income you’ll make during the year, you pay an estimated amount. Then, you make up the difference—paying a little bit extra, or getting a tax refund if you paid too much—after the year is over.
Who needs to pay quarterly estimated taxes?
If you’re a self-employed individual who will owe $1,000 or more in taxes for the year, you’re required to pay quarterly estimated taxes. If your business is incorporated, your corporation will need to make quarterly payments if it owes over $500.
Who is exempt from quarterly payments?
You don’t need to make quarterly payments if:
You earn your income as an employee—meaning, you aren’t self-employed
You meet three specific conditions:
You did not owe any taxes in the previous tax year, and did not have to file a tax return
You were a US citizen or resident for the entire year
Your tax year was 12 months long
In the second case, the IRS is giving you a break. If you didn’t owe or file taxes the previous year, then you don’t have a previous year’s numbers to base your tax estimate on. We’ll cover estimates, and how to make them, shortly.
Quarterly estimated taxes and bookkeeping
If your business needs to make quarterly estimated payments, good bookkeeping is essential to staying on track.
When you have a complete set of financial statements form the previous tax year, you’re better able to estimate this year’s liability. On top of that, bookkeeping info lets you plan your cash flow in the current year, so you don’t come up short when one of your quarterly payments is due.
Consider hiring a virtual bookkeeper like Bench to take care of your bookkeeping for you. Bench gives you a dedicated team to do your bookkeeping for you, so you always have the info you need to pay your taxes accurately and on time.
How to plan quarterly payments with DIY bookkeeping
If you do your own bookkeeping, it’s important to correctly categorize quarterly payments. Many business owners record them as expenses, such as “Tax Expense.”
However, the taxes you need to pay are personal expenses, not business expenses. Recording it as an expense on your books mixes it in with your business expenses, and makes your income statements inaccurate.
For the sake of keeping organized—and making sure your income statements correctly states your net profit before taxes—you should record quarterly payments as a draw.
In that case, you create an equity account called “Owner’s Taxes,” and draw quarterly payments into it from Capital. You then pull cash from Owner’s Taxes to pay the IRS.
Calculating your estimated taxes
There are two ways to calculate your estimated taxes for the year: With an income projection, and using the safe harbor rule.
Calculating estimated taxes with an income projection
If you’ve already projected your income for the year—that is, estimated how much you’ll earn and spend, based on past business performance—then you can make an estimate based on those numbers.
Add up you total tax liability, based on your projection—including self-employment tax, income tax, and all other taxes. Then, divide that number by four. The result is your quarterly estimated payment.
You can use worksheets on Form 1040-ES for individuals or Form 1120-W for corporations to help you make these calculations.
Calculating estimated taxes with the safe harbor rule
If you haven’t created an income projection for the year, the safe harbor rule lets you base your estimate on last year’s taxes. The best part? Even if your numbers are off, and you under- or overpay, the IRS won’t penalize you.
That’s because the safe harbor rule lets you pay the same amount of tax you did the previous year. If your income for this year is greater or lesser than that amount, you won’t be penalized—you’ll just have to pay to make up the difference, or else receive a tax refund.
One exception. If your business income is $150,000 or more, you’ll need to pay 110% of the previous year’s taxes in order to qualify for safe harbor.
To use the safe harbor rule to your advantage, take your total tax bill for last year, and divide it by four. That’s how much you’ll pay the IRS each quarter. It’s a quick and easy way to get your taxes set up for the year ahead, without creating complex financial projections.
Quarterly estimated tax deadlines for 2023
The year is split into four quarters of three months each. The payment for each quarter is due two weeks after the quarter ends.
Here are the quarterly estimated tax deadlines for 2023:
For the period Jan 1 to March 31: April 18
For the period April 1 to May 31: June 15
For the period June 1 to August 31: September 15
For the period September 1 to December 31: January 16, 2024
The Quarterly Estimate Tax Calculator
If you’re ready to dive head-first into quarterly estimated taxes, try Bench’s quarterly tax calculator. In eight steps, you’ll plan your quarterly payments for 2022.
—
Don’t feel like setting up quarterly payments yourself? Let a team of professionals at Bench do it for you—and get your taxes filed accurately and on time, with BenchTax