Estimated Taxes: A Guide for Self-Employed Individuals and Gig Workers

Estimated Taxes

Most people have taxes withheld from their paychecks, but if you're a freelancer, gig worker, or self-employed, that doesn't happen. Instead, you're responsible for paying your taxes yourself, and one way to do that is by making estimated tax payments.

Here’s all you need to know about estimated taxes, who needs to pay them, how to calculate them, and how to avoid penalties.

What Are Estimated Taxes?

Estimated taxes are payments made to the IRS four times a year to cover income that isn’t subject to automatic withholding. This includes income from freelancing, side jobs, small businesses, and even investment earnings. If you expect to owe at least $1,000 in federal tax after subtracting withholding and credits, you likely need to pay estimated taxes.

The IRS divides the calendar year into four payment periods. Each payment should reflect your expected income, deductions, and credits for that part of the year. These payments help you avoid a large tax bill at year-end and reduce the risk of underpayment penalties.

Knowing Who Must Pay

You must pay estimated taxes if you are self-employed or receive income not subject to withholding. This includes work as a freelancer, independent contractor, or gig worker through platforms like Uber, DoorDash, or Upwork. You might also need to pay estimated taxes if you earn income from interest, dividends, or rental property.

Even if you have a full-time job with tax withholding, a side gig may still push you into needing to make estimated payments. The key question is whether enough tax is being paid throughout the year. If it’s not, you’ll need to fill the gap yourself.

Calculating Estimated Payments

To calculate your estimated taxes, start with your total expected income for the year. Subtract business expenses if you're self-employed. Then apply the appropriate tax rates to find your projected tax bill. Divide this amount by four to spread the payments evenly across the year.

The IRS provides Form 1040-ES, which includes a worksheet and tax tables to help you calculate your payment. You can also use online tax tools or work with a tax professional. If your income changes during the year, you can adjust future payments to stay accurate.

Making the Payments

Estimated tax payments are due in April, June, September, and January. You can pay online through the IRS website, by phone, or by mail. Be sure to keep records of each payment. These will be helpful when you file your return and may be needed in case of an audit.

Missing a payment or paying too little can lead to penalties. The IRS may charge interest for late or underpaid amounts, even if you pay the full balance when you file your return.

Avoiding Penalties

To avoid underpayment penalties, most taxpayers should aim to pay at least 90% of their current year’s tax or 100% of the previous year’s tax, whichever is smaller. If your income is steady, this can be simple to follow. But if your earnings vary, you may need to calculate each payment based on actual income earned during that quarter.

You can also increase withholding from any regular job or retirement income to cover your side income tax. This is often a good option if you want to avoid quarterly payments.

Take control of your financial future with us at RP Financial Services! Whether you're self-employed, running a small business, or navigating complex tax questions, we are here to guide you. Book a consultation today.