The Awful Rowing Toward Quarterly Taxes, or Why I’d Rather Pay Yearly
I need to come to terms with quarterly estimated taxes.
Although I love many aspects of being a freelance writer, the payment of taxes is one of the more problematic ones. In my several years as a freelancer, I’ve been struck by the psychological difference between having the money first and then having to fork it over (freelance life) and not having the money first because taxes are automatically withdrawn (salaried life).
With a salary, the tax withdrawal feels invisible. Obviously it’s not, as you can look at a paystub and see how much tax is withheld, but it feels that way. Adam Smith wasn’t talking about the government pulling taxes out of your paycheck when he coined the term “Invisible Hand,” but that’s what it feels like to me.
But in freelance life, you have the money first and then it’s taken away. Freelance taxes are monies already in your hand—and you have to make plans that will make that money vanish.
I find it very difficult to do. So difficult that, for the last two years, I’ve paid one big annual bill rather than the estimated quarterly tax most freelancers pay.
But what makes taxes different from any other kind of bill paying? After all, having the money first and then making plans that will make that money vanish is arguably the case with every expense: mortgage, utilities, even groceries. I budget for expenses every month. I have spreadsheets for estimated income coming in and calculations for what I will spend each month.
All the monthly anticipated spending on my spreadsheets, from the mortgage to movies, is in a sense already-vanished money. $$$ will come in and $$$ will go out for a mortgage payment. $ will come in and $ will likely go out to see Get Out or La La Land. Like that.
Quarterly taxes ought to fit into this system easily. But, in my daily life as a budgeter, I think taxes feel different because the government feels like an amorphous bill collector. If you pay for a mortgage, you have a house to live in. If you pay for a movie, you see the movie. If you pay a tax bill… life goes on very much as before.
Let me make clear here that I have no theoretical problem paying taxes, and I know perfectly well that they pay for a lot of public goods and services. It’s perfectly fine with me to do my share. Life wouldn’t go on as before if everyone stopped paying, or if tax cuts become (more) draconian.
When I first moved to the area in which now live, I checked out local radio stations (looking at you, New Jersey 101.5!) while driving to get an aural lay of the land. I sometimes overheard a local call-in station fulminate about the amount and rate of taxes people spent.
The operating assumption was that the government was a vast sinkhole that no one should have to pay anything to, at any time, for anything. I don’t agree with that. I used to mentally scream at the station: “taxes pay for the roads you’re driving on!” “taxes pay for schools!” and so on, until I mercifully stopped listening entirely.
Still, I’d rather pay my taxes once a year. I feel comfortable paying once a year, because that’s when the bill is due. In some psychic space in my brain, it feels analogous to the way I pay utility bills. The bill comes in, and I pay it, for heat and light I’ve already used.
Perhaps readers are wondering about tax penalties for not paying quarterly! Last year, I was blissfully ignorant that this was even a penalty issue. Many years ago, I worked with an accountant, who nicely demystified April 15 by saying that it was a standard corporate bill collecting procedure to give customers three months plus a grace period of 15 days to pay their bill. That, more or less, is why April 15 is a red letter tax day: it’s three months and 15 days past the end of the year.
My unspoken corollary was that I was settling the bill for 2015 in 2016, so I settled it all at once. And I was never charged by the IRS.
It wasn’t until I had lunch with a fellow freelancer friend a few months ago that she mentioned her equally blissful ignorance—which was ended abruptly by receipt of a bill from the IRS. A penalty for not paying estimated tax.
Why didn’t I get one? At this stage, I can only hypothesize. As I grew my freelance business last year, roughly one-third of my income was W2 income (salary from teaching) on which taxes were already withheld. Maybe from the IRS’s perspective that obviated a need for estimated taxes?
This year, TurboTax popped up with a $28 penalty for underpayment of estimated taxes in 2016. TurboTax added it to the amount I owed the IRS. This seems quite reasonable, especially when one factors in the time required to estimate taxes. Roughly 20 percent of my 2016 income was salaried, and I also had many itemized deductions this year, so my taxes were just four figures.
As my references to TurboTax and not being clear about why I wasn’t charged a penalty might indicate, my freelance business has clearly reached a point where I need to find a good accountant and start making steady provision for taxes.
This will entail abandoning a system that has felt very comfortable as my business has grown. But clearly the most sensible thing is to set aside a certain amount periodically, perhaps in a separate account. I’ve started making plans to do this.
Now that my 2016 taxes are settled, I need to come to terms with the Invisible Hand.
Rita Williams is a writer, researcher, and teacher who loves words and archives. She blogs on culture, the arts, and education at Retaining the Meta: Adventures of a Midlife PhD. She also works as a ghostwriter in various sectors, including education and personal finance.
This article is part of The Billfold’s Tax Series.
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