I've recently started freelancing as a graphic designer in New York City after graduating college and am new to doing self employment taxes. My main question is whether I'm legally obliged to pay quarterly taxes or if I can do them annually. I've talked to others in my field and have found mixed answers: some pay quarterly and others do annually without a problem. I'd prefer to pay annually as long as I won't get fined!
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There is a handy flowchart called "Do You Have to Pay Estimated Tax?" It can be found in IRS Publication 505, Chapter 2, Figure 2A. The very first box in the flowchart asks "Will you owe $1,000 or more for 2010..." (html version here: http://www.irs.gov/publications/p505/ch02.html)
It's possible that your colleagues who have never penalized for not paying estimated tax have also never owed $1,000 in tax.
Your next question should be: "How in the heck am I supposed to know how much tax I will owe at the end of the year?" This question is especially difficult if you've just started freelancing this year, and you don't have figures from last year to look at.
The answer to these questions can help make a rough estimate of what you will owe:
What kind of income have you been making per month? How many months have you been freelancing? What are your expenses so far? Are you married? Have any kids? Do you itemize deductions? Did you pay any tuition this year? Do you have any college loans that you're paying on?
After your first year, you can use the Estimated Tax Worksheet, because you will know what you made last year (the first line on the worksheet). You will need to know whether you'll be making more, less, or about the same as last year. And you'll be able to avoid penalties by paying 90% of what you owed this year.
(If you're very ambitious:
You can try now to use the couple of worksheets provided for figuring your estimated tax. First you would use the Estimated Tax Worksheet on page 33 of Publication 505, down through line 16. This would tell you whether you need to file estimated taxes. Then, to find out how much to pay for the upcoming Sept. 15th estimated tax due date, go down column C of the Annualized Estimated Tax Worksheet on pages 40 and 41 of Pub. 505.
The first line of the first worksheet asks for your estimated Adjusted Gross Income. Typically you'll use your number from last year. But you could get a very rough estimate of that number by estimating how much income you'll have this year, subtract your estimated expenses, and deduct 1/2 of your self-employment taxes. Ask me how.)
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