As more professionals leave W-2 employment to start their businesses or work as freelancers, understanding how to manage taxes becomes crucial. Between 2020 and 2023, the number of full-time freelancers increased by 90% and part-time freelancers by 130%, leading to over 60 million professionals identifying as freelancers. The trend is expected to continue in 2024; therefore, 83% of freelance leaders feel optimistic about the future.
One significant responsibility for freelancers and independent contractors is managing their taxes, particularly quarterly estimated taxes. This guide will help you calculate quarterly estimated taxes for 2024.
Key Takeaways for Quarterly Estimated Taxes
Who Should Pay? Freelancers, independent contractors, and other non-W-2 employees need to pay quarterly estimated taxes if they anticipate owing $1,000 or more in taxes for the year.
When to Pay? Quarterly estimated taxes must be calculated and submitted four times a year.
How to Pay? The easiest way to manage and pay your quarterly estimated taxes is through professional services like Scout Tax. We offer a streamlined process to ensure accurate and timely payments. You can learn more and get assistance by visiting Scout Tax.
Understanding Estimated Taxes
Estimated taxes are payments made directly to the IRS four times a year, replacing the tax withholdings typically managed by employers for W-2 employees. These taxes apply to any income that does not have tax withholding, including:
- Interest
- Stock dividends
- Capital gains
- Self-employment income
Different states have varying requirements for estimated taxes, so it is essential to check with your state’s Secretary of State for specific protocols.
Who Needs to Pay Estimated Taxes?
You must pay estimated taxes if you operate as a sole proprietor, LLC, partnership LLC, or S Corp and expect to owe at least $1,000 in taxes for the year. Part-time freelancers whose employers withhold taxes from their primary income might still need to pay estimated taxes on additional income.
Safe Harbor Rule for Estimated Tax Payments
The IRS’s Safe Harbor rule helps businesses and freelancers avoid underpayment penalties. You will not incur penalties if you pay at least 0% of your previous year’s tax bill in estimated taxes and will make weekly payments.
Exceptions for Farmers and Fishermen
Farmers and fishermen have unique rules for estimated tax payments. They can pay all estimated taxes by January 15, 2025, or file their 2024 tax return by March 3, 2025, and pay any owed taxes. Those who do not follow the calendar year for their tax year, however, have different deadlines.
Who is Exempt from Estimated Taxes?
W-2 employees whose employers withhold taxes are typically exempt from estimated taxes. Additionally, if you meet the following conditions, you are exempt:
- No tax liability for the year
- You were a U.S. citizen or resident alien for the entire year
- Your prior tax year covered 12 months
Calculating Estimated Taxes
- Assess Total Taxable Income: Estimate your total income for the year or each quarter. Include any deductions to calculate your Adjusted Gross Income (AGI).
- Understand Taxes Owed: Calculate your income tax by applying your tax rate to your AGI. Calculate self-employment taxes for those earning over $400 a year, including 2.9% for Medicare and 12.4% for Social Security.
- Calculate Your Estimate: Add your income and self-employment taxes, then divide the total by four to determine your quarterly payment.
Quarterly Estimated Tax Deadlines for 2024
- Q1: January 1 – March 31, 2024 (Due April 18, 2024)
- Q2: April 1 – May 31, 2024 (Due June 15, 2024)
- Q3: June 1 – August 31, 2024 (Due September 16, 2024)
- Q4: September 1 – December 31, 2024 (Due January 15, 2025)
Penalties for Missing Quarterly Payments
Missing a payment deadline can lead to penalties determined by how much you underpaid and how late the payment is. To reduce penalties, it is crucial to make the payment as soon as possible after realizing you have missed a deadline.
Simplifying Quarterly Estimated Taxes
Handling quarterly estimated taxes can be complex, but many small business owners and freelancers turn to professional services for help. Scout Tax offers tax preparation, advisory, and other accounting services to ensure compliance and ease the tax burden.
Conclusion
Understanding and managing quarterly estimated taxes is vital for freelancers, independent contractors, and small business owners. Accurate calculations and timely payments not only help avoid penalties but also support financial planning. Do not navigate this complex process alone, let the experts at Scout Tax and Scout Industries assist you. Our professional accounting services provide the guidance and support you need to stay compliant and focus on growing your business.
Take control of your tax obligations today! Visit Scout Tax and Scout Industries to learn more and schedule a consultation.
