What should a taxpayer do if they are starting to earn significant amount of money through side business or business they are starting? Taxpayers engaged in freelance work should take special considerations to pay estimated taxes or they might be in for a few surprises when its time to pay taxes.
Estimated Tax Payments and 1040-ES
First, taxpayers should fill out a form 1040-ES (pdf) each quarter. The instructions tell you how to figure out how much to pay. The estimated tax payments are due 4/15/14, 6/15/14, 9/15/14, and 1/15/2015. Depending on your state, you may owe estimated taxes to them as well (usually on the same dates) and they’ll have a similar form to use. The following link has more information about 1040-ES and estimated taxes.
It might be an important consideration to deduct for home office expenses if the taxpayer is using their home to generate the income.
The 1040-ES for a freelancer is a little harder when there was no income from the activity in prior years.
Filing out the 1040-ES Form
if not then you do not need a 1040-ES filled out because you do not estimate taxes on a business that does not even have taxes to estimate. All the information for the 1040-ES is based off of those numbers. This means that you should just keep the money you would have paid quarterly in your own bank account and use a book keeping software to allocate the moneys to a tax liable account. The self employment tax is 15.3%. So that’s the percentage of the income coming from this job. Just pay off your 2014 with these funds and you will be able to have the 1040-ES for 2015 estimated taxes. You should have a tax preparer for this to make it easier.
Quicken and TurboTax Form 1040-ES
Software such as Quicken and TurboTax have premium features that can help a freelancer determine what their estimated taxes might be and develop a plan to set aside money to pay estimated taxes and develop a record for next year’s Form 1040-ES.