Author Topic: Am I required to make quarterly self-employment tax payments?  (Read 3792 times)

DebtFreeBy25

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I recently began freelancing regularly and am trying to determine whether I'm required to pay quarterly estimated self-employment taxes. I'm reading confusing and conflicting information. Although I have freelanced in previous years, I never earned much 1099 income ($1k or less per year) and, therefore, just reported the income and deductions on my annual income taxes. For 2015, I won't be reporting any self-employment income. I'm currently in limbo employment-wise and have no idea what my 2016 income will be.

My questions are:
  • Given my current (low) self-employment income, am I required to make quarterly payments?
  • If so, would my first payment be due on April 18th or June 15th?
  • How would I estimate these payments given that I had no self employment income the prior year? Would I just pay 15.3% of my estimated SE income for each quarter?

Here's what I know so far for 2016:

Tax status: Married filing jointly, child-free
W-2 income-Me: $8,003.70
  • I left this job and am unsure if or when I will return to a W-2 position. If I return to a full-time W-2 position, I will likely reduce my freelancing.
W-2 income- Husband: Best guess is that he will earn no more than $35,000 in W-2 income for 2016
Other income- Husband: $3,792 in unemployment with taxes withheld
Other income- Investments: Variable, unlikely to be more than $3,000 after deductions

We will most likely be in either the 15% or the 25% tax bracket for 2016.

Freelance income (Estimated when future earnings can be anticipated; actual to-date when they cannot):

Writing contract: $730 Will be paid out in increments between the end of March and beginning of June.
Tutoring: Best guess is ~$900 from the time I started (end of Feb) through the end of May. This income is a weekly direct deposit. I'm not anticipating tutoring in the summer and may not return in the fall if I'm working full-time.
Gig #1: $150 Not sure if this income is going to result in a 1099 or not. Would like to pick up more gigs with them but there's no guarantee that I'll qualify for any. (This income is through a market research firm.)
Gig #2: $90 The time to payment ratio is not working out well thus far, so I'm unlikely take more gigs with them. 
Other miscellaneous: <$50 Very unlikely to get a 1099 or any other income statement from any of these.

Total gross self-employment income for Q1 2016 will be no more $1k.


Planned deductions: Internet ($66/month), A portion of the cell phone bill (Business share is ~$42/month), Office supplies (So far, this is printer ink. Not sure what else I'll end up applying here.), Home office (Haven't figured this out yet. Home is owned outright and utilities are low, so it wouldn't be much.)

I'd really like to avoid having to pay estimated quarterly taxes if at all possible. I have filed our federal and state income taxes myself using TurboTax for the past 3 years. If I have to make quarterly estimated self-employment tax payments, I will have to calculate the amount and file them myself, as I'm not generating enough income to pay for a program/service. Potentially owing taxes at the end of the year is not a huge problem. We have owed additional federal taxes as W-2 employees for the past 4 years. (We were relatively high earners with no children and few sizable deductions.) Having a tax bill at the end of the year isn't a major issue; I just don't want to have to pay a penalty.

Any thoughts or advice would be much appreciated. Thanks!

ShortInSeattle

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Re: Am I required to make quarterly self-employment tax payments?
« Reply #1 on: March 10, 2016, 11:07:53 AM »
According to the IRS website you need to pay quarterly tax if you believe you'll have 1000 or more "owed" tax at the end of the year.

https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estimated-Taxes

If you're concerned about variable income check out this calculation method:

http://quickbooks.intuit.com/r/money/estimated-tax-payments-should-you-use-annualized-income/

SIS

dandarc

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Re: Am I required to make quarterly self-employment tax payments?
« Reply #2 on: March 10, 2016, 11:16:49 AM »
Even if you would owe too much come year end, you can account for that by increasing your withholding at a W-2 job. 

Bottom line is you need to have enough withheld from paychecks or sent in via quarterly estimates to hit one of a few safe-harbors to avoid penalties - the $1,000 or less owed is one of those safe-harbors. 

If you do make quarterly payments, either make them all equal or keep good records so you can show your income was uneven throughout the year and avoid penalties if your estimated payments are back-loaded.  I switched from full-time W-2 to 1099 mid-year in 2011, and not having good enough records meant I paid around $60 in penalties / interest.  Could have spent hours and hours pouring over bank statements and what-not to get all the inputs, but decided it wasn't worth it at that point.  If I had all of my documents organized and ready to go like I do now, I could have saved a few bucks with just a few minutes of extra work on the taxes that year.

NoStacheOhio

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Re: Am I required to make quarterly self-employment tax payments?
« Reply #3 on: March 10, 2016, 11:53:50 AM »
From what you said, I'm not 100% sure of your husband's employment situation, but in years where my wife has had substantial 1099 income, I've just increased my withholding instead of paying quarterly.

DebtFreeBy25

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Re: Am I required to make quarterly self-employment tax payments?
« Reply #4 on: March 10, 2016, 11:58:20 AM »
Thanks for your responses! All of the various information I've read regarding SE taxes is starting to make sense now.

My understanding is that I can qualify for the safe harbor provision if:
  • A- I earn less than $15k in SE income in 2016 and, therefore, owe less than $1k in SE taxes. OR
  • B- We increase our withholding rate at a W-2 job.

Currently it is unlikely that I will earn more than $15k in SE income this year unless I give up my full-time job search and devote all of my efforts to freelancing. My husband is currently working as a W-2 employee, so we could increase his withholding to cover my SE taxes. Regardless, qualifying for a safe harbor provision seems like the way to go as estimating my quarterly payments would be a challenge.

dandarc

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Re: Am I required to make quarterly self-employment tax payments?
« Reply #5 on: March 10, 2016, 12:31:18 PM »
Wait - you just jumped from estimated taxes to self-employment taxes?  On 15K of self-employment income, your self-employment taxes alone would be over $2,000: $15K * .9235 * .153 = $2119.  Then you're adding to your income and likely increasing federal income taxes as well - if you are in the 25% bracket, that's another $3500, roughly.

We were talking about estimated taxes before - that encompasses both of these things, and you and your husband's income tax on your W-2 income.  You owe self-employment tax on just about any significant amount of self-employment income - the only time you're not required to file schedule SE is if you made less than $400 in self employment income.

DebtFreeBy25

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Re: Am I required to make quarterly self-employment tax payments?
« Reply #6 on: March 10, 2016, 01:09:24 PM »
Wait - you just jumped from estimated taxes to self-employment taxes?  On 15K of self-employment income, your self-employment taxes alone would be over $2,000: $15K * .9235 * .153 = $2119.  Then you're adding to your income and likely increasing federal income taxes as well - if you are in the 25% bracket, that's another $3500, roughly.

We were talking about estimated taxes before - that encompasses both of these things, and you and your husband's income tax on your W-2 income.  You owe self-employment tax on just about any significant amount of self-employment income - the only time you're not required to file schedule SE is if you made less than $400 in self employment income.

The terminology is getting a bit muddled. I understand that I have to pay federal and state income taxes in addition to SE taxes on SE income. I've paid taxes on SE income before, but it was under $1k in 1099 income so I just handled it on our income taxes without having paid an estimated quarterly payment or increasing our withholding. The <$15k in SE income would equal <$1k in taxes owed was an oversight based on a stat I read last night, not an actual calculation. (According to QuickBooks, a SE person who makes more than $15k OR will owe more than $1k should make quarterly payments. Late night googling leads to decreased reading comprehension.)

I'm trying to avoid making estimated quarterly SE tax payments, and it sounds like the best way to do that is increase our W-2 withholding to cover the anticipated SE, federal and state income taxes on my SE income. (For anyone who's unfamiliar with SE tax, it covers Social Security and Medicare taxes that would be paid by your employer if you were a W-2 employee. SE taxes get complicated because they're payed based on your net profit, SE income minus qualified deductions.

dandarc

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Re: Am I required to make quarterly self-employment tax payments?
« Reply #7 on: March 10, 2016, 01:32:21 PM »
Cool - I was confused there.

Yeah - bump your late-year withholding to cover whatever the shortfall will be once you have a good picture of your tax situation.  Helps if the company is good about getting these W-4 changes into play quickly.

One benefit of doing this via withholding is that it is assumed to be evenly spread throughout the year, so if you can have enough withheld this way, that is a good method.

DebtFreeBy25

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Re: Am I required to make quarterly self-employment tax payments?
« Reply #8 on: March 10, 2016, 02:33:06 PM »
Cool - I was confused there.

Yeah - bump your late-year withholding to cover whatever the shortfall will be once you have a good picture of your tax situation.  Helps if the company is good about getting these W-4 changes into play quickly.

One benefit of doing this via withholding is that it is assumed to be evenly spread throughout the year, so if you can have enough withheld this way, that is a good method.

Thanks! That's really good to know. Right now I would struggle to estimate the taxes on my SE income because I don't know what tax bracket we'll finish the year in and don't have a prior year to base an estimate on. Factoring an estimated yearly total later and paying my SE and income taxes through a increased withholding would be more accurate than trying to make quarterly estimated payments.