Estimated Taxes and the Freelancer
True or false: that if you receive non-wage income this year, then also this year you will be called on to make estimated tax payments pegged to this year’s income, and will even be liable for penalties if your estimated tax payments fall short of this level? False, of course. Yet I regularly see people new to freelancing getting “informed” that it is true! (Not that the phrasing used in so “informing” them makes clear the absurdity of what it is asserting, of course.)
Estimated tax payment minimums are, with an exception happening to be favorable to the taxpayer, fundamentally pegged to last year’s tax-related transactions. In particular, your total tax from last year minus any withholding done this year should normally be getting paid, roughly quarterly, as the estimated tax payments as correctly defined.
In case you are having a worse financial year than you had last year (although the following can still be applicable and helpful to you even if you are having a somewhat better year), you have the option of “requesting” next year (really, filing on the basis of) a likely small reduction below the standard minimum. Meanwhile you can be making payments that reflect the anticipated reduction.
Note that if business picks up next quarter, paying at least the standard minimum at about the end thereof (for example, by June 15 or September 15) is likely to be advisable. The tracking of your year as worse or better does boil down here to the contemporaneous-at-first analysis of quarterly figures.
As the IRS “underpayment” form (2210) itself makes clear, the tax authorities do not help themselves to an estimated tax windfall simply because your income this year will be getting reported next year on a form in the 1099 series. If it will be so reported for the first time as a consequence of your being a newcomer to freelancing, welcome to the neighborhood!