A Conversation: Self-Employment Taxes & Estimated Quarterly Payments for Art Freelancers
Let me preface this that I'm not an accountant, so I don’t know the total accuracy in everything I wrote down here. The information below is from a conversation I had with a friend, but since then multiple people have asked me this same question, so I figure I can put it all here for others to see as well.
Federal Income tax:
This amount depends on how much you made total (both from regular employment and freelancing). As you make more, the amount that makes more gets taxed at a higher % bracket. The different percentage is applied only to the portion under that bracket and not the entire thing. Check the Federal Income Tax Brackets
Social Security and Medicare tax:
Social Security tax 12.4% + Medicare tax 2.9% = 15.3%. If you work for a company, the employer pays half of that, so you only have to pay your half of 7.65%. If you are self employed, however, you have to pay the full 15.3%. Because of this difference, the 15.3% is known as the Self-Employment Tax (more on this later).
State income tax:
This is different depending on your state. Some states don’t have income tax. Check the California Tax Brackets:
Regular Employment:
When you work for a company, tax is taken directly out of your pay check. The amount taken out is only an estimate based on the info you filled out in the W4 form when you're hired. Then at the end of the year, the company gives you a W2 form that tells you how much money you made from them, and how much tax has been taken out. The amount is Income tax + SS tax + Medicare tax. The SS and Medicare portions you only pay half and the company pays the other half. When you do your taxes, if this is the only company you worked for, then the amount taken out should be pretty accurate, and you will usually receive a small tax return.
Multiple Jobs:
The estimated tax amount, however, doesn’t account for income from other sources, and the additional amount might fall under a higher tax bracket, so you’ll have to pay more taxes. If you’re a regular employee at another company, you may want to lower your deductions on your W4 so that more taxes get taken out to account for your other jobs (It is recommended to claim 0 to get the maximum of taxes taken out just in case).
Freelancing and Self-Employment:
This is where it gets complicated. Unlike regular employment where taxes are directly taken out of your paycheck, when you are a freelancer, you get paid in full, and you have to pay taxes on your own later. As a freelancer, you pay the same income tax. However, unlike a regular employment where the employers pay half of the Social Security and Medicare taxes, you are subjected to paying the full 15.3% for Social Security and Medicare. This amount is commonly referred to as the Self-Employed tax.
If you make more than a certain amount, the clients might send you a 1099 form to tell you how much you made, but it's not required, so you should keep track of all of your self-employed income on your own.
Quarterly Tax Payment
The government doesn’t like the idea that as a freelancer you can go for a long period of time making money without paying your taxes, so if you are expected to owe more than $1000, they want you to pay QUARTERLY. If you don't, you will get penalized and pay an extra fee.
The good news is that only the profit of your self-employed income is taxable. You can write off expenses related to your business to lower that profit amount, so keep all of your receipts for things that are related to art so you can write off your expenses.
To calculate your estimated quarterly tax payment:
Find your Estimated AGI (Adjusted Gross Income): Your total of what you estimate to make if you keep making the same amount for the rest of the year minus your deductions and expenses
Estimated AGI = (what you made this quarter - expenses and deductions) x 4 quarters
Find your Estimated Income Tax: Take your AGI then look up your tax bracket if you were to keep making this same amount for the rest of the year. It’s easier to round it up to the highest percent and over pay a little. For most people it’s 22%. It may be different for you.
Estimated Income Tax = AGI x 22% (or whatever your tax rate is)
Find your Estimated Self-Employed Tax: Only 92.35% of the adjusted total income is taxable, and self-employed tax amount is 15.3% (12.4% Social Security tax + 2.9% Medicare).
Estimated Self Employed Tax = (AGI x 92.35%) x 15.3%
Add it all up and divide by 4 to find your quarterly tax payment:
Quarterly Tax Payment = (Estimated Income Tax + Estimated Self-Employed Tax) / 4
To put it all in one line:
( (Estimated AGI x tax rate) + ((Estimated AGI x 92.35%) x 15.3%) ) /4 = Quarterly Tax Payment
Summary
For regular employment: The Income tax is based on how much you make. You only pay 7.65% for SS and Medicare. Companies withhold taxes directly from your paycheck.
For freelance: you pay income taxes from your freelance on your own + 15.3% for SS and Medicare. Write off your business expenses to lower your taxable income amount. Pay this amount quarterly to avoid penalties.
Again I'm not an accountant so you should probably double check everything I just mentioned lol