How to Calculate and Pay Your Own Income Tax

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on December 7, 2009 in Finance, Freelance Writing Business
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The two things I loathe about a freelancer’s finances are health insurance and income taxes. I thought I hated paying taxes when I worked full-time for someone else. Seeing the money that was taken out of my paycheck was depressing. I didn’t know how good I had it.

Paying tax as a freelancer is even worse. Not only do we pay more taxes, we have to send in the taxes ourselves. But, it’s the law of the land we live in, so if you don’t want to end up with a huge tax debt, paying taxes is a must.

Who Owes Estimated Tax

You must pay estimated tax if you owed tax last year or if you expect to owe at least $1,000 tax this year.

If you’re still working full-time, you can avoid paying estimated tax by having your employer withhold more taxes from your paycheck. Using Form W-4, you can either adjust your exemptions or have your employer withhold a specific amount.

How Much is the Tax?

You’re responsible for paying both regular income tax and self-employment tax.

You can calculate your regular income tax using your effective tax rate. Most people know about the tax brackets for regular income tax, but if you simply calculate your taxes based on the tax bracket you fall into, you may end up paying more tax than you have to.


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Rather than spend an entire post telling you how to figure out your effective (aka marginal or average) tax rate by hand, I’ll just point you to a calculator from SmartMoney.com. The calculator is at the bottom of the page and will tell you how much tax you owe and your tax rate.

You must pay self-employment taxes if you made more than $400 from freelancing (or other self-employment work). The self-employment tax rate is 15.3% (12.4% of the tax is for social security and 2.9% is for Medicare).

Only $102,000 of your earnings is subject to the social security tax. You must pay $2.9% Medicare tax on all your earnings.

You get a break on your federal income tax by paying self-employment tax. Half the self-employment tax is taken from your gross income to calculate your regular tax. (You must still pay self-employment taxes on your 100% of your net freelance earnings.)

Paying Estimated Taxes

Estimated taxes are due four times during the year – April 15, June 15, September 15, and January 15. If you pay late, pay too little, or don’t pay at all, you face a penalty from the IRS.

Figure out your quarterly tax payments by adding your regular income tax to your self-employment tax and dividing by 4. (You might also use H&R Block’s estimated tax calculator to see how much tax you’ll owe.) This is the easiest way to calculate your estimated taxes, but usually results in overpayment. It’s not so bad. It just means you’ll get a refund when you file your income taxes next year.

The longer, more accurate way to figure your estimated tax is to use Form 1040-ES. Or, if your income fluctuates throughout the year, you can use the annualized income installment method using Schedule AI in on page 4 of Form 2210.

You can pay estimated taxes by mail or electronically. To pay by mail, print and fill out the vouchers included with Form 1040-ES. Write your check for the amount of your estimated tax payment and send your voucher and check by the due date.

To pay electronically through the IRS Electronic Federal Tax Payment System, visit http://www.eftps.gov or call 1-800-316-6541. You can make single payments or set up a recurring payment for the entire year by credit card or electronic draft from your checking or savings account. Note that the IRS uses a third-party company (who charges a fee) to process credit card payments.

Don’t Forget About State Taxes

In this post, I talked about the taxes you owe to the Federal government. If your state has an income tax (AK, FL, NV, NH, SD, TX, TN, WA, and WY do not), check with your state Department of Revenue to find out what estimated taxes you need to pay.

Recap

  • annual estimated tax = regular tax + self-employment tax
  • regular tax = income * effective tax rate (regular tax calculator)
  • self-employment tax = income * .153 (plus income over $102,000 *2.9%)
  • quarterly tax payments = estimated tax / 4
  • Pay quarterly tax on the 15th of April, July, September, January.
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LaToya Irby is a full-time freelance writer and a graduate of the University of Alabama. She primarily writes about personal finance, freelancing, and other self-employment topics.

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4 Comments

  1. Clint Osterholz December 8, 2009 Reply

    Frankly, this article should have about a million comments on it, thanking you for clearing up this supremely confusing issue. THANK YOU.

  2. Jennifer Mattern December 8, 2009 Reply

    Definitely. I’m so glad LaToya’s here to talk about these types of things, because I certainly wouldn’t want to do it. I’m sure a lot of people hate taxes, but freelance taxes? Oh, they can be a nightmare. Thanks LaToya!

  3. Author
    LaToya Irby December 8, 2009 Reply

    I figured I’d gotten everyone so confused, they couldn’t figure out how to comment! :)

    It’s worth mentioning that you can also pay 100% of the tax you owed last year and avoid penalty, but if your income has increased vs. last year, you could end up owing more taxes when you file.

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