Do I need to make estimated tax payments on freelance income?

Probably, if your freelance income is more than a small amount.

Taxes in the U.S. are pay-as-you-go. Your employer takes taxes out of every paycheck, but nobody does that for freelance income. If you expect to owe about $1,000 or more when you file, the IRS expects you to pay some of it during the year. If you don't, you may owe a small penalty on top of the tax.

What to expect

• Freelance profit is taxed as regular income, plus roughly 15% self-employment tax that goes toward Social Security and Medicare.
• Quarterly payments are usually due in April, June, September, and January.
• Illinois works the same way: if you expect to owe more than $1,000 in state tax, you're expected to pay during the year too.

A simple way to avoid a penalty
You're generally safe if what you pay during the year covers at least last year's total tax (110% if your income was over $150,000), or 90% of this year's tax.

Other options worth considering

• Have more taken out of your day-job paycheck. Fill out a new Form W-4 with your employer. Extra withholding can cover your freelance taxes so you don't have to send quarterly payments at all.
• Set aside part of every freelance payment in a separate savings account, so the money is there when taxes are due. Many people start with 25 to 30%.
• Track your freelance expenses, such as software, equipment, and mileage. They lower the profit you're taxed on.
• Look into a retirement account for self-employed people, such as a SEP IRA or Solo 401(k). Contributions can lower your taxable income while you save for the future.

Everyone's numbers are different, so a quick projection is the easiest way to know how much to set aside.