January 15th, 2007
According to IRS Form 1040-ES, which is glaring at me from the pile of papers on my desk, the fourth and final of my 2006 tax payments is due on Tuesday, January 16. If you don’t know about quarterly tax payments for freelancers and sole proprietors, this IRS page will get you up to speed. As will this one. And this page from my archives may also shed some light on the situation.
Uncle Sam does offer instructions on how to estimate your quarterly tax payments, but because I have not been mathematically inclined since college calculus, I rely on my friend the accountant to keep me in check. My income last year was a bit different than it’s been in past years (and not in a positive way), so I checked in with my friend the CPA recently to see if I was estimating my tax payments correctly.
I get a lot of Google hits from people looking for info on how to estimate their quarterly taxes, so I thought I’d summarize our conversation. (Know that I am not a legal or financial pro, and you are not my CPA pal’s client, so we take no responsibility for what you do with your taxes. If you have questions, see a tax pro. Seriously.)
OK, now that I’ve covered my hide, let’s get on with the quarterly tax recap.
Me: Is there some magic formula for figuring out how much of a quarterly tax payment I should make?
CPA pal: There’s no precise formula because taxes owed will vary with annual business expenses as well as state income tax. [Anti 9-to-5 note: Income tax varies from state to state. For example, Washington state, where I reside, has none. However, California, where I used to reside, does have a state income tax.] However, here’s a rough way you can estimate:
If your freelance income for the year (minus any major business expenses) is less than $50,000, you would pay approximately 25 percent to the IRS — “approximately” being the operative word here. $50,000 to $100,000, you would pay about 30 percent. And more than $100,000, you would pay about 33 percent.
Me: If I did the work in 2006 but the check doesn’t come till 2007, I pay taxes on that amount in 2007, right?
CPA pal: Bingo.
Me: If I want to hire a subcontractor to help me when times are busy this year, the only tax forms I need to send them are a W-9 to fill out before we start working together and a 1099 come January 2008, yes?
CPA pal: Oh, wise freelance friend of mine, I have taught you well. You are correct again. And for a small fee, I will even send out that 1099 form for you.