Do you have to pay estimated taxes for your side hustle or business? This estimated tax hacks article offers tips and tricks for freelancers and business owners who have to pay quarterly taxes.
Have you ever gotten to April 15 and realized you had to pay estimated taxes and found yourself with empty pockets?
If you’re a 1099 contractor, a business owner, a blogger, or anyone who earns a non-job income, you may be required to pay estimated taxes. In a job, your employer withholds money from your paycheck for taxes throughout the year. But when your clients pay you for your business, no taxes are held back for the government. So you may be required to pay an estimate of the taxes you will owe on April 15.
This situation can be tough for startups to manage. You’re already paying for your salary and business expenses. And figuring out how to add tax payments on top can be even more difficult.
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Estimated Tax Payments Don’t Have to Equal Stress
Getting a call from your account in early April that you owe thousands or even tens of thousands of dollars in tax is extremely painful and stress inducing. I know from personal experience!
It took me years to figure out how to make paying estimated taxes less painful. Although I offer some general tips and ideas to try here, I am not a finance or tax professional in any way. You should always consult with a licensed professional when it comes to your taxes and your personal financial situation.
Here are some tips on how to make quarterly tax payments without pain:
#1 – Accurately Determine How Much to Pay
Your accountant can help you determine how much and how often you need to pay throughout the year to avoid an underpayment penalty. You can also use the IRS Withholding Calculator to forecast the amount of tax for the year. In addition to estimated federal taxes, you may need to pay state, county, and municipality estimated taxes throughout the year.
Before you can know how much to pay, you’ll have to think about your total income, credits and deductions you’ll be taking, and your tax liability for the coming year. Your accountant is a valuable resource for helping you with this.
#2 – Know the IRS Estimated Tax Filing Dates for 2019
Here are the dates the IRS estimated tax payments are due in 2019:
- 1st quarter – April 15, 2019
- 2nd quarter – June 15, 2019
- 3rd quarter – September 15, 2019
- 4th quarter – January 2020
#3 – Set Up an Estimated Tax “Bucket”
When a client pays me and the funds are deposited, I transfer a percentage of the money into the estimated tax bucket. I use a financial budgeting software called YNAB (You Need a Budget) which makes this very easy.
Before I used YNAB, I would always know I had to pay taxes quarterly and would stress out about the amount I had to come up with, but I never designated a separate amount for taxes. I would frantically allocate as much as I could and sometimes pay an underpayment penalty.
When I get paid now, I simply transfer the percentages I need for federal, state, and local taxes to the tax bucket. The money sits in the bucket until I write estimated tax checks.
I really recommend YNAB if you are having trouble saving for a lot of planned expenses, such as estimated taxes. When I started using YNAB, I went from being stressed all the time and not knowing how to pay the bills that came up to having peace of mind because I had all the cash I needed to pay the bills for two months.
#4 – Use High Yield Savings to Earn Interest on Your Estimated Tax Money
You could also set up an estimated tax bucket with a high yield savings account. Simply move the funds earmarked for taxes to high interest rate savings and then transfer it back to checking when you make the quarterly payments.
#5 – Set Up Email or Phone Alerts
If you forget to pay your estimated taxes on time, you could face penalties. Here’s an estimated tax hack: Set up an alert for the filing dates and you’ll never forget to pay.
#6 – Realize the Money’s Not Yours
This is one of the hardest mindset shifts I had to make as a freelancer. When you finally complete that big project and deposit that fat check, you may want to splurge since you worked so hard. But paying estimated taxes is easier when you realize that the chunk you save for taxes isn’t yours, it’s the government’s. If you never think of it as yours in the first place, it’ll be easier to avoid spending it when you shouldn’t.
How to Pay Estimated Taxes
There are a few ways you can pay your estimated taxes.
#1 – Send in Your Quarterly Tax Payments via Snail Mail.
Grab your stamps and print out a copy of the Internal Revenue Service 1040-ES. This form will help you estimate your self-employment taxes. At the bottom of the page is a voucher and the address you need to mail it to, depending on your state. Print the voucher and mail it with your payment by the estimated tax due date.
It’s a good idea to get a tracking number for your payment envelope so you can point to the tracking information if your payment is not received in time.
#2 – Register with the Electronic Federal Tax Payment System (EFTPS).
If you’d like to pay your estimated taxes online, you can complete the registration for the US Department of the Treasury’s EFTPS. Once you register and set up a PIN, which may take a couple of weeks, you can pay your estimated taxes.
#3 – Use the IRS Direct Pay Service and Pay Online.
Another easy way to pay estimated taxes online is using the IRS Direct Pay service. This service is free. You simply fill out your name, address, Social Security number, filing status, tax year for payment and the reason for payment (which is estimated tax).
The IRS Direct Pay Service allows you to use your business checking account (free) or credit card (2.9% fee) to pay your estimated taxes.
Do you have any tips on paying your estimated taxes without pain? What strategies do you have that make paying quarterly taxes easier?
