If you have self-employed clients, gig workers, freelancers, or anyone with income that doesn’t have taxes withheld, estimated taxes need to be part of every conversation.
How It Works
The U.S. tax system is pay-as-you-go. W-2 employees have taxes withheld from every paycheck. Self-employed people don’t. Instead, they make quarterly estimated tax payments directly to the IRS on April 15, June 15, September 15, and January 15 of the following year.
Who Needs to Pay
Generally, anyone who expects to owe $1,000 or more in tax after subtracting withholding and refundable credits. That includes sole proprietors, independent contractors, freelancers, landlords with rental income, retirees with insufficient withholding, and anyone with significant investment income.
The Penalty
If a client doesn’t make estimated payments or underpays them, the IRS assesses an underpayment penalty calculated on Form 2210. The penalty isn’t catastrophic, but it’s completely avoidable. Clients hate surprises, and an unexpected penalty erodes trust.
The Two Safe Harbors
There are two ways to avoid the penalty. Method one: pay at least 90% of the current year’s tax liability through withholding and estimated payments. Method two: pay at least 100% of the prior year’s total tax (110% if the prior year’s AGI exceeded $150,000).
Method two is easier because you already know last year’s number. Take the prior year’s total tax, divide by four, and that’s each quarterly payment.
Your Role as a Preparer
When you finish a client’s return and see self-employment income, don’t just hand them the return and collect your fee. Calculate their estimated payments for the coming year and provide the payment amounts and due dates. This takes ten minutes, prevents next year’s underpayment penalty, and positions you as someone who genuinely looks out for your clients. It’s also a billable service for future years.
For training on estimated taxes and building proactive advisory services into your practice, visit musespring.com.