The pandemic has delayed the April 15 deadline for filing 2019 federal taxes by three months to July 15.
But for the self-employed who work as freelancers or contractors, who prepay their taxes four times a year, and don’t have the ability to tweak their W2 withholding, they’re on the hook for two bills from the taxman on July 15.
For estimated tax filers, it “could be a big chunk of change going out the door in mid-July,” said Greg McBride, CFA and chief financial analyst at Bankrate, because 2019 annual taxes and the first two-quarters of estimated taxes for 2020 are due on the same day.
Under regular circumstances, the year is divided into quarters and individuals estimate their tax bill based on what they made for the previous quarter. Their bill is due about six weeks later and, depending on the amount, the IRS might send a penalty bill for more money or a refund if there was an overestimation.
COVID-19 has derailed the IRS calendar and now freelancers and self-employed individuals are tasked with estimating their tax payments to cover the first five— instead of three— months of the year.
“Both payment periods have been extended to July 15, so the tax payment that you would normally make at the end of the first quarter by April 15, has been extended to July 15,” McBride said. “So has the payment that normally carries a June 15 deadline which was also extended to July 15.”
Those looking ahead, the second estimated tax due date comes Sept. 15 and covers income earned from June 1 to Aug. 31. The third due date is Jan. 15, 2021 for income earned between Sept. 1, 2020, and Dec. 31, 2020.
Do I have to pay estimated taxes on my side-hustle?
Probably. Income that exceeds $400 is taxable by the Internal Revenue Service. Considering that’s a relatively low threshold to clear over the course of a year, most people who are self-employed, freelance, or hustle on the side and expect to owe at least $1,000 to the IRS annually have to pay their taxes quarterly.
Because your side-hustle income isn’t taxed upfront like paychecks from an employer, the IRS wants its share quarterly. And it’s up to you to figure out how much to pay based on how much you’re earning.
You’ll also owe a self-employment tax that will fulfill your obligations to pitch in for government programs like Social Security and Medicare.
How do I know how much to pay?
Conventional wisdom says to start by saving 30% of your income for your tax bill. To take the guesswork out of it — especially if you don’t have a strong foundational understanding of accounting — hire a certified public accountant (CPA) who specializes in self-employment to handle all of your business financials.
If you’re just starting out or can’t afford to pay a CPA to advise you, McBride recommends using tax software that can keep track of your expenses, income, write-offs, and estimate your quarterly and annual tax bills. Some software programs have integrated payments with the IRS so you can electronically file at tax time.
Read more information and tips in our Taxes section