I earn income from various gigs, including telemedicine and teaching, almost all of it as an independent contractor. This means being responsible for paying estimated income taxes. Physicians deal with this quite a bit and so it’s worth addressing.
Back in the day when I was moonlighting as a resident, it seemed so complicated to make estimated income tax payments. Now that I have mastered my own budgeting strategy, paying estimated income taxes is nearly on autopilot.
Income as an independent contractor usually is paid on a 1099-MISC IRS form. This is so that it can get reported to the IRS and written off as an expense by the business making the payment.
Resident physicians start moonlighting in residency and are often familiar with paying estimated income taxes.
Income earned as an employee, paid on a W2 form, which we commonly refer to as our paycheck. It already has some taxes deducted and so you aren’t responsible for paying estimated income taxes.
Estimated Income Taxes
Every US citizen who has earned income is responsible for paying estimated income taxes. As employees we don’t do it because our employer does this task on our behalf.
The IRS refers to US income taxes as a pay-as-you-go tax system. When you earn money, you need to pay your fair share to the IRS so that they can balance their books.
You can send in an estimated tax payment whenever you want, every week, every month, or every quarter which is when it’s actually due.
Estimated Income Tax Due Dates
Estimated taxes are due on the following dates every year:
- January 15th
- April 15th
- June 15th
- September 15th
This percentage varies from year to year but is often blown out of proportion. The penalty often will amount to very few dollars.
The penalty rate percentage varies from year to year. In 2018, you are penalized by around 3% for the year, for only the amount you underpaid.
Example: If the money is 30 days late then the amount that was underpaid – say, $2,000 – would be fined at 3%. And only for the portion for the year that it was late. So 30 days would be calculated as 30/365.
Here is the fun math, ($2,000)*(0.03)*(30/365) = $4.93. Which is a couple of expired condoms from the convenience store.
In practice, I set a notification on my calendar and when one of the above 4 due dates approaches I look at my YNAB budget and however much money is in the account, I mail it off to the IRS and to my local state.
Well, I don’t mail it. I use online payment services which are free.
In the past I have also used my bank’s bill-pay service to mail out my payments to the proper authorities. But I still prefer making the payment online.
If you are allergic to manually doing this, you could pay for a payroll service which will manage your estimated taxes for you.
Even as a sole proprietor, you can have the income paid to you after estimated taxes are withheld from each check and sent off to the IRS or your particular state.
This seems a little excessive but some prefer this method. Payroll services generally have an expense of ~$100/month. Consider companies such as Gusto, Paychex, ADP.
Automating Estimated Tax Payments
If you know how much money you’ll be earning for the year then you can just send the entire payment for the year up-front to the IRS. You can automate this by setting up a recurrent payment from your bank account and mail out the checks.
Alternatively, you can send 4 equal payments throughout the year. You might still have a penalty to pay if you earn most of your money in one quarter and less in another quarter. In my opinion, this is the best option since the tax penalties are minimal.
If you have an accountant then they can handle paying estimated income taxes on your behalf. This will require you to let them know what your approximate income is and they’ll need to know how much you earned the previous year.
Budgeting with a budgeting software such as YNAB is the easiest way of keeping good income records.
You also need to have a basic idea of what your write-offs and income is. This will help you figure out approximately how much money you need to set aside for federal, state, and payroll taxes.
Keeping solid records will also protect you against random and incorrect IRS audits.
If you want to estimated you income taxes for federal and state, use Tax-Rate’s calculator. It’s the best one I’ve found so far.