Independent contractors for on-demand delivery services do not need to file or pay additional taxes each quarter. The term “quarterly taxes” has created some confusion about this.
Independent contractors agreed that they're providing services as a business, not as an employee. As a result, they're on their own for setting aside tax payments. The quarterly estimated payment system is how those payments get sent in.
How do you know if you have to make quarterly payments? How much should you pay? When do those payments need to be made, and can you get in trouble for not making payments?
We'll discuss these things and try to clarify the confusion about quarterly taxes for gig economy delivery workers.
About this article
Entrecourier.com focuses on the business of being an independent contractor for delivery gig economy companies. Thus, much of our content is focused on delivery work. However, because gig work is a form of self-employment, most of these principles will apply to other self-employed individuals and freelancers.
This article focuses on quarterly tax payments relating to federal income and self-employment taxes in the United States. This is not tax advice. Do not take it as such. The purpose of this article is to inform and educate, to help you understand how taxes work. For advice specific to your personal tax situation, you should seek out a tax professional who can provide guidance.
We discussed quarterly payments in episode 75 of the Deliver on Your Business podcast. You can listen to the article with the links or the video below.
What are quarterly estimated taxes?
Let's make this clear immediately: This is not an additional tax for independent contractors.
Because you're not an employee, no taxes are taken from your pay from gig companies like Shipt, Roadie, Spark, Grubhub, and all the others. That means you're on your own for that.
However, the IRS says that taxes are pay-as-you-go. Taxes for income should be paid as the money is earned.
Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. If the amount of income tax withheld from your salary or pension is not enough, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards, you may have to make estimated tax payments.Internal Revenue Service Estimated Taxes page
If money is not taken out of your pay along the way, you must set it aside and then send it to the IRS regularly. The IRS has set four quarterly deadlines for you to make those payments.
This quarterly system is an independent contractor's version of creating their own tax withholding system. It's how you pre-pay your income and self-employment taxes.
Who has to pay quarterly taxes?
Anyone who thinks they may owe more than $1,000 by filing their taxes should make quarterly payments.
This isn't just for independent contractors and sole proprietors. Individuals who do not have enough taken out of their paychecks or who have other income, such as investments, may need to make such payments.
It just happens to gig workers more frequently because self-employed income is often a substantial portion of their earnings.
How do you calculate quarterly payments?
Here are a few essential things to understand about how taxes work.
- Your taxes are based on profits or what's left over after expenses.
- Quarterly tax payments are for income taxes and self-employment taxes. The income tax rate starts at 10%, and self-employment taxes are 15.3%.
- The IRS prefers you make four equal-sized tax payments. However, individuals with inconsistent and unpredictable incomes (as is often the case with gig workers) can vary their payments based on their income.
- If you or your spouse are employed, you can choose to increase your paycheck withholding to cover your gig work taxes rather than send in quarterly payments.
Understand that the following is my personal observation only: The IRS doesn't seem to care how you figure out your payments. Their main concern is that 90% or more of your taxes (within $1,000) are paid by the end of the year.
The important thing is that you find a way to ensure your taxes are mostly covered by the end of the year. We'll look at a few methods that people use to do so.
Method 1: The IRS's four equal payments
I mentioned earlier that the IRS prefers four equal payments. This works pretty well if you have relatively consistent earnings. You can estimate your expected profits, taxes, deductions, credits, and payments. Then take whatever you anticipate owing and divide that by four.
This is the method used in the worksheet in the IRS 1040-ES booklet. The IRS does not require you to use that worksheet, nor do they require you to include it with your quarterly filing.
The IRS recommends that you “use your prior year's federal tax return” as a guide. Some who expect earnings, tax payments, deductions, and credits to be consistent with the year before may look at what they had to pay in and divide that by four.
If you expect significant income fluctuation, you might use one of the following two methods which calculates your numbers as you go.
Method 2: Use software programs to calculate your payment.
Some bookkeeping software programs designed for the self-employed have features that calculate what you should put aside for taxes. The best two that I've found are Hurdlr and Quickbooks Self-Employed.
Throughout the year, you track your income, expenses, and mileage. You also set up a tax profile, providing information such as filing status and what other income and withholding you expect for the year. These programs do the calculations for you and recommend how much to set aside.
Method 3: Set aside a percentage of your profit for the quarter.
A simpler method would be to determine a percentage you need to set aside regularly. Suppose you know your monthly gross income and your expenses. In that case, you can calculate your profit and multiply that against that percentage.
I see a lot of advice for gig workers suggesting that you set aside a percentage of your total earnings. I don't believe that's a good idea. Usually, that kind of guidance comes from people not thinking about the impact of business expenses.
Many of us drive significant distances while providing delivery services. Because of this, a large portion of our income can be written off as a business expense (to the tune of 62.5 cents per mile as of the second half of 2022). 25% of your gross income could be 50% or more of your actual taxable income.
This is the method that I've used. Because I receive payments for my delivery work every week, I do this weekly:
- Calculate my expenses as 62.5 cents per mile driven for the week.
- Subtract that expense from my total earnings to come up with your profit.
- Multiply profit by 20% to get my estimated taxes for the week.
- Set that amount aside in a separate bank account, and pay the accumulated total quarterly.
I came up with 20% because I found that to be right about what I needed for previous tax returns based on several years of self-employment. Many will start with 25% (15% self-employment and 10% income). Your best number may vary depending on your personal tax situation.
Method 4: Let your tax pro figure it out for you.
This may be the best method of all. If you are unsure of how taxes work or are struggling to determine what to send it, it may be better to get a tax professional to look things over.
This is the closest I would come to offering tax advice: Get some help. Having someone who can examine your personal and business finances can often save much more than what you pay. They can identify ways to save and things you can write off that you may never have thought of.
When and how do you make payments?
The IRS has four due dates for submitting quarterly tax payments.
- April 15
- June 15
- September 15
- October 15
You may have noticed that these don't align with three-month quarters. At one time, the dates were spaced three months apart. Somewhere along the line, Uncle Sam decided he wanted to get third-quarter money into the coffers in September instead of October. That was because the government's fiscal year ends on September 30.
The process is pretty simple. You send your payment in with IRS form 1040-ES. That form isn't very complicated; it essentially asks two things:
- Who are you?
- How much are you sending us?
There are several ways you can make your estimated quarterly payment, including:
What happens if you don't make payments?
You won't go to jail for not making quarterly payments. However, if you didn't prepay your taxes enough by year's end, you may be assessed penalties or interest. Penalties are typically around 5% of the underpayment amount.
If you have to pay less than $1,000 on tax day, or if you get a refund, there is no problem with not making estimated payments. The IRS also makes some other allowances for certain situations.
In conclusion, it's not as much a question about whether you have to make quarterly payments, as much as it's about whether it's a wise move for you. Ultimately the answer lies with whether you'll owe money at tax time if you don't make those payments.
This also isn't about whether you've used the quarterly payment system, as much as it's about whether you owe money at tax time. The IRS wants your taxes paid through the year instead of at the end of the year. They give you a lot of leeway in how to do that, whether by making quarterly estimates or by having additional money withheld from a paycheck.
Ultimately, the benefit of quarterly payments is peace of mind. If you are prepared and have made payments through the year, you'll avoid the panic that often hits gig workers at tax time.