In this installment of Ask the Tax Expert, we cover the tax requirements when you have a full-time job and a freelance side-gig. Learn if part-time freelancers have to make estimated tax payments.
Q. I have a W2 position but have also started freelancing on the side. I expect to make about $15,000 this year from the side business. Do I have to make estimated payments every quarter or can I just settle it at the end of the year on my tax return?
-Andy P., San Francisco, CA
A. You don't "have" to make estimated tax payments during the year. But, if you don't, you may have to pay an estimated tax underpayment penalty when you file your tax return. Whether you'll have to pay such a penalty depends. There's no estimated tax underpayment penalty if the total tax on your return is less than $1,000. This number should be calculated using withholding.
If your tax bill is more than $1,000, you can still avoid an underpayment penalty. This happens if the estimated tax payments equal the lesser of 90 percent of your tax liability for the current year or 100 percent of what you paid the previous year.
This is 110 percent if you're a high-income taxpayer. You fall into this if you have adjusted gross incomes of more than $150,000 or $75,000 for married couples filing separate returns.
Thus, you can avoid paying any estimated tax if your withholding is sufficient to pay for 90 percent of the tax you'll owe. You can have your employer increase your withholding to make sure you meet this threshold. To do so, you must file a new IRS Form W-4 with your employer.
You can use the IRS Withholding Calculator to determine how much you must you should be withheld to cover your expected tax liability for the year. If you earn less from your freelancing than you anticipate, you could end up overpaying your taxes. You'll have to wait for the IRS to refund such an overpayment when you file your taxes the following year.
Paying estimated tax gives you more control over how much tax you prepay. If you do elect to pay estimated tax, the payments are due four times per year: April 15, June 15, September 15, and January 15.
You decide how much to pay with each installment. You can pay by mail, electronic withdrawal from your bank account, or by credit or debit card.