I just started freelancing this year in addition to my full-time job. Do I need to pay quarterly taxes on my freelance income this year or next year? Where can I find the quarterly schedule? If I didn't pay this April, am I late and will I incur a fine, or can I pay double next quarter? How can I calculate how much to pay each quarter?
If you are doing freelance work in 2018, you may need to make estimated tax payments. The safe harbor rules for paying in estimated tax for any given year, through withholding and/or estimates, are as follows:
- For federal tax, you must pay in either 100 percent of the prior year (2017) tax (110 percent if prior year adjusted gross income was more than $150,000) or 90 percent of the current year tax (2018).
- For Pennsylvania the rules are basically the same without the 110 percent requirement.
Since it is sometimes difficult to determine what current year tax may be, the prior year tax is often the easiest to use. As long as that amount is paid in for the current year through withholding or estimates, you would not incur any underpayment penalties. When your 2018 tax liability is ultimately calculated, if the amount you paid in is not enough compared to your actual 2018 tax liability, you can pay any balance due by April 2019 and no penalty or interest will be assessed. This applies to federal and Pennsylvania tax.
To avoid making federal estimates, you could increase the federal withholding on your wages. Withholding is considered to be paid evenly throughout the year, so even if you increase the withholding now (to compensate for missing an estimate payment in April), there would be no underpayment penalty. You don’t have the ability to do this on the state level because Pennsylvania withholding is based on a fixed percentage.
If your federal or state withholdings are not enough and you need to make federal or state estimates, you should pay them evenly in four equal quarterly amounts. If you don’t pay in enough in any quarter, you will be charged an underpayment penalty for that quarter, which is essentially equal to interest. You can make up the difference in a later quarter. There is another method where you can annualize your income and pay in estimates unevenly based on your taxable income each quarter, but this is rather complicated and time-consuming, and it would be difficult to explain how to do that in this forum.
For both federal and Pennsylvania, quarterly estimates are due April 15, 2018, June 15, 2018, Sept. 15, 2018, and Jan. 15, 2019.
Be sure to check out the federal and state instructions for calculating estimates. Also keep in mind that it’s usually best to work with a tax preparer to help you with these calculations.
For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.
Answered by: Daria D. Palaschak, CPA, is a tax partner with Sisterson & Co. LLP in Pittsburgh, Pa.