Tax refunds are nice. Unfortunately, I won’t be getting one given I didn’t pay quarterly estimated taxes in 2014 despite my freelance income. So why didn’t I pay quarterly estimated taxes given there’s a likelihood I’d pay a penalty if I did not?
Uncertainty and certainty.
I was uncertain whether I’d freelance for the entire year. After spending most of 2012 and 2013 working on my own business, adding 25 hours a week of freelance work was a new endeavor. But I enjoyed freelancing so much (and didn’t get fired) that I decided to commit to at least a whole year. Furthermore, my consulting client was kind enough to offer stock options, so I had an added incentive to stay for at least the one year cliff.
What I was certain about was earning a higher W2 income since my online business kept growing. When it comes to estimated taxes, my accountant suggests following the safe harbor rules and paying 10% more than the previous year’s tax liability. By doing so, even if you earn a much higher percentage in the current year, you’re safe from having to pay penalties and fees of any underpayment. If you’re unsure about your business outlook, to be safe, it’s advised to pay at least 90% of your prior year’s tax liability.