Freelancers: Don’t Make This Mistake With Quarterly Taxes (Or Prepare to Pay a Penalty)

Did you know that if you’re a freelancer or side-hustler and you don’t file estimated taxes, that you could be facing some serious penalties?

Don't Skip Quarterly Taxes or Pay a Penalty
Updated May 13, 2024
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Amanda Grossman is a blogger and entrepreneur who helps people tackle financial issues.

“I've been a personal finance blogger for 10 years now on Frugal Confessions, where I help people take control of their finances so that they can save for the life they want, and Money Prodigy, where I partner with mothers to help teach their kids how to manage money,” said Grossman.

Despite blogging for over a decade, Grossman had never paid estimated taxes (also known as quarterly estimated tax payments, or simply quarterly taxes). While that wasn’t a problem because her self-employment earnings had been relatively low, she was hit by a surprise penalty when she filed her income tax return for the tax year 2017.

If you’re a new freelancer or if you just started a new side hustle, you may have to deal with estimated taxes, too. Here’s what Grossman learned — and what you can do to avoid costly tax mistakes.

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What happened to Amanda

Grossman has been running her websites for a number of years, but incorporated as an LLC about five years ago. Amanda is required to file a federal tax return for her business, as well as a personal tax return.

“I've always filed taxes on my business, but at the end of the year when I pay for our full taxes,” said Grossman.

According to Riley Adams, CPA and owner of Young and the Invested, most people who earn income from a side gig have to make quarterly tax payments.

“As a freelancer, entrepreneur, small business owner, or independent contractor, you will most likely need to pay estimated taxes quarterly,” said Adams. “Because salaried employees pay taxes each paycheck (via withholding), you must pay as you go at regular intervals as well. Not doing so will likely result in underpayment penalties or other charges and consequences.”

According to the Internal Revenue Service, estimated taxes are part of a process where you pay taxes on money that is not subject to typical withholding. For example, money that a client pays directly to you for a service you provided, without money taken out for federal taxes or Social Security. In general, the IRS wants taxpayers to pay at least 90% of their taxes throughout the current year through withholding or estimated taxes.

If you are running your own business or self-employed, then the due dates for your quarterly estimated taxes are:

  • April 15
  • June 15
  • September 15
  • January 15 of the following year

How Amanda mishandled her taxes

While estimated taxes are usually necessary for most freelancers and independent contractors, it’s not a universal requirement.

“For those of you who do not know, if you owe less than $1,000, then you do not get a penalty from the IRS for failing to pay estimated taxes,” Grossman said. “For each year that I've earned any income with my blogs, my tax payment came in under $1,000.”

However, things were different in 2017. When Grossman filed her prior year's taxes, she found out she owed $1,112 in unpaid tax. And by being just $112 over the $1,000 threshold, she had violated the IRS guidelines for estimated tax payments and the IRS issued Grossman a penalty. According to Adams, that’s common.

“The failure to pay penalties are 0.5% of the balance per month until it's paid off,” he said. “The maximum charged is 25% of the total balance. Interest is also charged on the outstanding balance, which is based on the federal short term rate plus 3%, which is subject to change.”

In Grossman’s case, the estimated tax penalty was quite small; she only had to pay an additional $11.00 in penalties to the IRS. But as someone who helps teach finance to others, she found it an educational experience that she won’t forget in future years.

“If you owe more than $10,000, the federal government — and possibly the state — might take out a lien against your property as collateral for tax payments,” said Adams. “Further, the IRS may attempt to garnish wages if you don't have enough money to pay your taxes.”

A better way to handle your taxes

While Grossman only faced a relatively small penalty, the incident served as a wakeup call for how she managed her business and taxes.

“Fortunately, [the penalty] was a very small amount,” she said. “But it was enough to kick me into gear. Since 2017, I've successfully filed estimated taxes each quarter.”

Previously, Grossman just thought paying estimated taxes was an unnecessary hassle. But this experience made her realize how important it was to manage her business as professionally as possible.

“The reason I had not paid estimated taxes was because it wasn't important enough to me to do,” said Grossman. “But you know what? I should have known that as my business income grew, I would need to step it up and make sure I was doing everything to stay legal. I've since become more proactive around legal things — such as updating privacy policy statements as soon as I hear of new legislation, paying estimated taxes, and, as my business has grown quite a lot in the last year, looking into hiring a business tax consultant for help.”

If you’re a freelancer or have a side gig, it’s a good idea to review your tax situation and see if estimated tax payments are necessary. If you just do freelance work on the side, adjusting your withholding at your day job can be a smart way to avoid estimated tax payments. But if you do a lot of side work, or you aren’t an employee at all, then you’ll want to take Adams’ advice.

“Freelancers who earn $2,000 or less in freelance income can probably skip estimated tax payments and just report this freelance income when you file your tax return,” said Adams. “If it looks like you'll owe more than $1,000 or more in taxes, however, you will want to use IRS Form 1040-ES to get a sense of how much you'll make during the year and then determine and pay your estimated taxes based on these projections.”

FAQs on quarterly taxes

What happens if you forget to pay estimated taxes?

If you forget to pay your estimated taxes, you could be charged a penalty for late payment, as well as a penalty when you file your tax return.

What are exceptions to the penalty for underpayment of estimated tax?

If there was an unexpected disaster or event that prevented you from making your payment, or if you retired or became disabled, you might be considered to have reasonable cause to have the penalty waived. If you have not experienced an unusual circumstance, then you will be unlikely to qualify for a waiver.

What form do I need to pay estimated taxes?

To pay your estimated taxes, you should use form 1040-ES. You can also pay your quarterly estimated taxes online.

The bottom line

If you earn taxable income outside of a full-time job with an employer, you may have to pay estimated taxes. To avoid costly penalties and accidentally breaking tax laws, follow these steps:

  1. Use the IRS Tax Withholding Estimator: You can use the tax withholding estimator to find out how much money you’ll owe at tax time, helping you avoid a surprise tax bill and penalties.
  2. Set aside portions of your income: Whenever you earn additional income, set aside a portion of your earnings to satisfy your tax obligations. Adams recommended that you set aside 25% to 35% of your self-employment income for taxes. You may even want to keep this in a separate bank account so you aren't tempted to use the money.
  3. Make payments online: You can pay your estimated taxes online through IRS Direct Pay. If you’re caught by a surprise tax bill, you can use a 0% APR credit card to pay your taxes. Using a credit card to pay your taxes will incur a fee, but it will ensure you pay your bill on time and avoid costly penalties (as long as you also pay off your balance before the intro APR period runs out).
  4. Talk to a tax professional: If you’re not sure about how much you owe or how much to set aside from your earnings, meet with a tax professional to get personalized advice and guidance. Even the best tax software is no substitute for individual help

As Grossman found, failing to pay estimated taxes can result in a nasty surprise bill. By making a plan for how to manage your money and setting aside some of your earnings for your quarterly payments, you can satisfy the IRS’ requirements and avoid unnecessary penalties.

U.S. Bank Business Checking Benefits

  • Earn up to a $800 bonus when you open a new, eligible U.S. Bank business checking account online with promo code Q2AFL24 and complete qualifying activities.
  • Subject to certain terms and limitations.
  • Offer valid through August 30, 2024.
  • Member FDIC.

Author Details

Kat Tretina

Kat Tretina is a personal finance expert focusing on practical financial matters, including student loans, debt repayment, side hustles, insurance, and healthcare. Drawing from her personal experience, she aims to simplify complex financial topics and provide individuals with the information they need to make informed decisions.