NEW YORK (MainStreet) – The premise of this piece started out simply enough: Is it easier for a taxpaying freelancer to pay quarterly or to take a penalty and make one lump-sum payment by April 15?
Like freelancing itself, however, it became far more complicated than it seemed on the surface. The result read like a point-by-point rebuttal of everything the author of this story did incorrectly after becoming a freelancer in 2008. The financial advisors, financial planners, certified public accountants and tax-preparation professionals not only spelled out the level of preparation and dedication it takes for a freelancer to sort out their finances before tax season, but the implications of some of the worst missteps a freelancer can make.
“Most people who become freelancers have neither the experience nor the desire to see themselves as a businessperson, and that's what every freelancer is,” says Susan Lee, an enrolled agent and certified financial planner who specializes in tax preparation for freelancers. “Everybody wants their own chief financial officer to come take care of their finances, they want a chief business officer to come take care of their vacations. Whatever they want, they don't want to spend the time and the energy to learn how to do it and just do it.”
As Lee and her colleagues collectively pointed out, the self-employed are not only required to file an annual return, but also pay estimated income taxes quarterly to avoid penalties (welcome to Form 1040-ES). You have to pay either 90% or more of the tax for the current year or 100% of the tax shown on the previous year’s return to avoid being hit with a penalty. If you're a freelancer, independent contractor or business owner successful/unfortunate enough to make an adjusted gross income over $150,000, you'll have to pay 110% of that year's levy. Once you've figure out that amount, you can mail your quarterly payments with Form 1040-ES vouchers or pay electronically.