One of the best ways to pay off student loans faster is to pick up a side hustle to increase your income.
But earning more money can complicate your financial situation when it comes to filing your taxes. Especially if the work you do on the side means generating income outside of your paycheck.
If you work as a freelancer, consultant, or any other type of independent contractor, you earn 1099-MISC income — and that comes with unique estimated quarterly taxes.
From what they are and why you need to pay them, to how to file them, here’s everything you need to know about quarterly estimated taxes.
What are estimated quarterly taxes?
When you earn 1099-MISC income, you receive all that money directly from the business or individual paying you.
They are not responsible for taking money out of your earnings and sending it to the Internal Revenue Service (IRS) on your behalf. That responsibility is yours alone.
Estimated quarterly taxes is the method the IRS uses to collect the money you owe in taxes from the taxable income you earned throughout the year.
This covers income taxes and self-employment taxes. The “quarterly” refers to the fact that you need to make payments on your taxes four times throughout the year.
The deadlines are usually April 15, June 15, September 15, and January 15 of the next year. If the deadline falls on a weekend or holiday in a given year, the IRS usually extends the last day to pay to the next business day.
Missing a deadline or failing to pay your estimated taxes may lead to penalties on top of what you owe.
Will you owe quarterly estimated taxes?
If you earn money on the side to help you repay your student loans, then you probably owe taxes on it.
Remember, the IRS expects you to report all the money you’ve earned in a given year. Any earnings over $1,000 make you subject to paying estimated quarterly taxes.
But if this is the first time you’re hearing about quarterly estimated taxes, don’t freak out. You can check out IRS Publication 505 to find out when you need to start paying your quarterly estimated taxes.
Plus, if you had no tax liability in the previous year, you may not be penalized this year if you missed a payment or two. That’s because the IRS does not penalize taxpayers who owe less than $1,000 in taxes after accounting for deductions and credits.
If you paid at least 90 percent of the taxes you owe this year or you paid 100 percent of what you owed from the previous year, you’ll be free from immediate penalties.
How much will I owe for estimated quarterly taxes?
Your next question may be, “How much do I owe?” The short answer is, it varies.
The exact number you need to set aside will depend on the state you live in, how much total income you make, the amount of deductions and tax credits you can take, and the way you file those deductions (standard or itemized).
Luckily, Form 1040-ES is available to help you figure out how much you’ll owe. It requires you to estimate how much you’ll make for the year from your 1099-MISC income.
Another good rule of thumb is to take 30 percent of any 1099-MISC income you earn and set it aside in a special savings account. Earmark that money for your estimated taxes. That way, you’ll already have what you owe set aside every time the deadline rolls around.
And if you find that you overestimated how much you owed, you can take the surplus and put it towards your other debts.
How to file quarterly estimated taxes
If you owe estimated quarterly taxes, consider working with a Certified Public Accountant (CPA) to help you.
As your financial situation grows more complicated, the value of having a professional on your side grows. A CPA can help you file the correct amount, take all the deductions you’re entitled to and process the necessary paperwork.
However, if you decide to file estimated quarterly taxes on your own, follow this basic process:
- Cautiously estimate how much money you will earn for the year — and then calculate the tax you owe on that income. You can use Form 1040-ES if you want to get an official number
- Once you estimate how much in taxes you will owe for the year, divide that number into four quarterly estimated tax payments
- Look up the deadlines for the current year, and mark them down in your calendar so you know when you must pay each quarter
- Use the blank vouchers found on Form 1040-ES to send in your payment.
- Fill out the voucher, include a check, and mail to the address specified on the form
- Keep copies of the checks you send. You’ll need them to file annually in April, and you’ll want proof of the payments you made throughout the year
Remember that this process outlines the steps you need to take to make federal estimated quarterly tax payments.
You also need to make estimated quarterly tax payments to your state. You can look up the proper forms by running a Google search “[your state] + estimated tax payment forms.”
Why filing estimated quarterly taxes is important
Again, earning 1099-MISC income from freelance work, in addition to W2 income from your day job, adds a level of complication to your financial situation.
While you may want to consider hiring a CPA to help you, you can learn how to file them on your own. However, it could be worth it to set aside some of your extra earnings to pay a pro for their guidance and advice on your specific circumstances.
At the end of the day, you want to do everything in your power to avoid owing taxes to the IRS.
And by setting aside money for estimated quarterly taxes, you’ll be able to budget exactly how much of your finances you can contribute towards paying down debt, saving up for a big expense, or building up your retirement fund.
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