The first year of freelancing often ends with an unpleasant surprise: a big tax bill and a penalty on top. It’s not because anyone did anything shady. It’s because the U.S. tax system is pay-as-you-go, and when there’s no employer withholding tax from each paycheck, that job falls to you.
Who needs to pay estimated taxes
Generally, you should make estimated payments if you expect to owe at least $1,000 in federal tax for the year after subtracting withholding and refundable credits. That commonly includes:
- Freelancers, contractors, and gig workers
- Small business owners and partners
- People with significant investment income, rental income, or alimony from pre-2019 divorces
- Employees with large side incomes
What you’re paying
- Federal income tax at your bracket rates (see how tax brackets work)
- Self-employment tax of 15.3% on most net self-employment earnings — that’s the employer and employee halves of Social Security and Medicare combined. You can deduct half of it.
- State income tax, if your state has one — most states with an income tax have their own estimated payment schedule.
The due dates
Despite the name, the “quarters” aren’t even:
- Income earned January–March: due April 15
- April–May: due June 15
- June–August: due September 15
- September–December: due January 15 of the next year
If a date falls on a weekend or holiday, it moves to the next business day.
How to avoid the underpayment penalty: safe harbors
You generally won’t owe a penalty if your withholding plus timely estimated payments equal at least the smaller of:
- 90% of this year’s tax, or
- 100% of last year’s tax (110% if last year’s adjusted gross income was over $150,000, or $75,000 if married filing separately)
The prior-year safe harbor is the easiest for people with growing income. Take last year’s total tax, divide by four, and pay that each quarter. Even if you owe more in April, you won’t be penalized for underpayment.
How to estimate what to pay
- Estimate your net self-employment income (revenue minus business expenses).
- Use the worksheet in IRS Form 1040-ES, or tax software, to calculate tax.
- Divide by the number of payments remaining.
- Adjust mid-year if your income changes a lot.
A simpler habit many freelancers use: move 25% to 30% of every payment into a separate savings account as soon as it arrives. It’s not precise, but it means the money is there. This works best once you’ve separated business and personal finances.
How to pay
- IRS Direct Pay from your bank account, free
- Your IRS online account
- EFTPS, the Treasury’s Electronic Federal Tax Payment System
- Debit or credit card (with processing fees)
All options are listed on the IRS’s payments page. Save confirmation numbers.
Have a W-2 job too? Adjust your withholding instead
If you have a regular job plus side income, you can ask your employer to withhold extra federal tax by updating your Form W-4. Withholding is treated as if paid evenly throughout the year, which can make catching up easier than quarterly payments.
Lower the bill legitimately
- Track every business expense
- Contribute to a SEP IRA or Solo 401(k)
- Deduct self-employed health insurance premiums if eligible
- Fund an HSA if you have a qualifying plan
- Consider year-end tax moves before December 31
Bottom line
If you earn money without withholding, set aside a percentage of every payment, pay four times a year, and use the prior-year safe harbor to avoid penalties. It takes a little discipline, but it turns April from a crisis into a non-event. For more on how pay rates translate after tax, see what $30 an hour is really worth.
General information only; consider a tax professional for your situation.
