I’m an Independent Contractor: Why I Pay Quarterly Instead of Annual Taxes
Written by
J. Arky
Edited by
Zuri Anderson
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As an independent contractor, you have a lot of flexibility to determine when, where and how you work. On the other hand, there’s not as much wiggle room when it comes to paying your taxes, which lots of freelancers have to do not annually, but quarterly.
Why are taxes for someone working a 1099 or other freelance job set up like this? GOBankingRates asked some freelancers and tax experts why quarterly payments are made instead of annual taxes.
Better for Savings
One freelancer — who wished to remain anonymous — has a business that combines photography, filmmaking and graphic design and noted that being an independent contractor allows them a freedom that a typical 9 to 5 job does not.
This independent contractor pointed out that there are multiple reasons why they pay quarterly taxes as opposed to annual.
“First and foremost, it is easier to save weekly and pay quarterly than it is to pay annually,” the freelancer commented. “I speak from experience as I have done both. I always found it so stressful going into tax season because I knew I would have to pay a chunk.”
“Independent contractors are required to pay quarterly taxes because they don’t receive a paycheck,” explained Stephen A. Weisberg, founder of The W Tax Group, a nationwide tax defense company.
Accurate Record of Earnings
Weisberg went on to describe how when someone is an employee for a company, their taxes are taken out of their paycheck every time they are paid. Then the taxes are sent to the IRS to make sure the employee pays taxes on the income earned.
“But when you’re an independent contractor, whether you’re a freelancer, gig worker or small business owner, taxes are not being automatically withheld from your income,” continued Weisberg. “The IRS doesn’t trust that you’re going to have enough money to pay the tax you owe at the end of the year, so they make you send in taxes each quarter instead.”
Avoiding Penalty Charges
Weisberg cautioned that any freelancers or independent contractors who do not make estimated payments each quarter could be subject to a penalty. While this fine might not be incredibly expensive, it is still money that does not need to be spent, especially if a 1099 worker is on a limited income.
“There are no/little penalties to pay if you are submitting quarterly payments even if you underpay,” the freelancer who spoke to GOBankingRates explained, adding “I was audited in 2014, which is very unpleasant, and in my case, it was due to an error by a client. But that taught me to keep better books even if I’m not making millions.”
The freelancer noted that they typically plan to pay 12% of their independent contractor earnings each quarter by automatically transferring a set dollar amount every week into a separate bank account solely for taxes.
“The real issue with not making estimated payments is when you don’t have enough money to pay your taxes at the end of the year, at which point huge penalties arise, and IRS-enforced collections begin,” concluded Weisberg. “Paying quarterly allows you to pay as you go somewhat similarly to if your taxes were taken from your paycheck.”
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