When you work as a freelancer, your clients pay you an agreed upon fee for your work and explicitly do not withhold any tax payments you owe on that income. The job of staying up-to-date with your federal tax payments is entirely dependent on you when you are a freelancer.

You are responsible for paying income tax, and also making required Social Security and Medicare tax payments. If you live in a state that collects income tax, you will also need to handle periodic state tax payments.

When are estimated tax payment due?

Freelancers are expected to file their estimated federal income tax and Social Security/Medicare payments four times a year.

The four quarterly estimated tax deadlines:

• April 15th (for the first quarter of the year)

• June 15th (for the second quarter of the year)

• Sept 15th (for the third quarter of the year)

• January 15th of the following year (for the 4th quarter of the previous year.)

Each quarter you are expected to make one payment that covers your income tax and Social Security/Medicare payments.

You can pay your quarterly federal estimated taxes online, using IRS Direct Pay. There is no fee if you authorize a direct debit from a bank account.

Quarterly payments are called “estimated taxes” because you don’t know exactly what your tax bill will be for the entire year. When you eventually complete your annual federal tax return you will report the estimated quarterly tax you’ve already paid. If those quarterly payments are more than what your tax return says you owe for the year you will get a refund. If your estimated tax payments don’t cover 100% of the bill, you will need to make an additional payment to the IRS.

Tip: If you have a High Deductible Health Plan (HDHP) you can reduce your tax bill by contributing to your personal health savings account (HSA). All contributions are tax deductible regardless of income up to the annual contribution limit. The lower your taxable income, the less you will owe in income tax and self-employment tax.

If you also have a state income tax, you will need to file quarterly as well; a quick web search for “estimated tax payment” and the name of your state will lead you to info on how to file.

How to calculate your quarterly tax payment

There are two parts to your quarterly tax payment:

• Income Tax

• Social Security and Medicare Tax (called Self-Employment tax)

Income Tax: If this is your first year as a freelancer, it can be tricky to know what your income tax rate will be as you will likely have significant expenses you can claim as a business deduction, which reduces your taxable income.

If you have steady income, the general rule is to file four equal quarterly payments. But the IRS is hip to the notion that freelance income can be a bit erratic, so it’s perfectly okay to send in different amounts each quarter reflecting your income for that quarter. As long as your estimated payments end up being equal to at least 90% of what you actually owe when you do your year-end return, there will be no penalty for underpaying when you made quarterly payments.

Self-employment tax

Self-employment tax includes social security and medicare taxes that individuals who work for themselves must pay. As of 2023, the self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

The Social Security tax rate is 12.4% for self-employed workers (as of 2023), and is levied on earnings up to an annual limit, which is set each year. Every dollar above that amount is not taxed for Social Security. While you are required to pay Social Security tax at the 12.4% rate if you are self-employed, you will able to claim half of your payment as a deduction when you eventually file your year-end tax return. You get that deduction even if you don’t file an itemized tax return.

For Medicare, your base tax rate is 2.9% (as of 2023), and it is charged on every penny of earnings. You may also an additional Medicare tax payment of 0.9% on earnings above those levels.

Get started with Lively

If you are looking for an easy-to-use health savings account to help reduce your taxable income and offer you tax-free saving, investing, and spending on health-related expenses, reach out to us at Lively.