If you’re self-employed or earn income as an independent contractor, then you have to handle your own taxes. What does this mean exactly? When you begin earning money as an independent contractor, you essentially become a business of one. And just as a company will withhold money from an employee's paycheck to send to the IRS, you may need to take out your own taxes from the money you earn.

Who needs to pay quarterly taxes?

Here’s a general rule-of-thumb from the IRS for determining if you should be paying taxes quarterly:

If you expect to owe more than $1,000 in taxes for the year for your freelance or contracting work (which amounts to around $3,000 or more in profit) then you may need to pay quarterly taxes.  

What about year-end taxes?

If you’ve been paying quarterly taxes and by the end of the year it turns out you’ve overpaid, then you’ll get a refund! Conversely, if you’ve underpaid you should be able to balance up in April. We recommend you speak with your tax accountant.

What do you need to track in order to pay?

You may need to diligently track and collect earnings (in the form of paystubs, or invoices) and business type (if you do different types of labor). Tracking expenses may help lower how much you owe. Common expenses include anything that is “ordinary and necessary for your business.” Common examples may include:

• Mileage

• Home office expenses

• Meals with clients

• Supplies

• Software for business (e.g. Microsoft Office)

It's a safe rule of thumb to put aside 30% of each paycheck so it's available to pay quarterly taxes when the time comes. However, we recommend you speak with your tax accountant when you have questions.

How do you pay?

Here are the forms used to calculate and file quarterly taxes:

Schedule C: Used to record 1099 income plus any related expenses. This profit is then subject to self-employment taxes, federal income tax, and state income tax. The Schedule C isn’t required for paying quarterly but it’s helpful to have.

1040-ES: Is the worksheet for calculating quarterly taxes.

When do you pay?

Here are the deadlines:

How do you submit a payment?

There are two ways to send in payment:

• Electronic: Payment must be submitted by 8pm Eastern then day before the due date. This can be done via a system called EFTPS.gov.

• Physical Mail: Payment should be postmarked on or before the due date. First, print and fill out a 1040-ES form for the corresponding quarter (for Sept. 15th that would be the Q3 Voucher). Then write a check to the United States Treasury for the amount owed. Finally send it to the nearest IRS mail center.

What happens if you don’t pay?

If payments aren’t made quarterly when due, penalties may be assessed. Typically, these penalties are around 6-8% penalty on the amount underpaid. So if you made $10,000, owe $2,000 in taxes, and didn’t pay quarterly taxes, you might be subject to a penalty of 6% of the $2,000 underpayment, which is $120.