Got hit with $18K tax bill from Upwork 1099 income - should I have been paying quarterly?

Just filed my 2024 taxes and I'm in shock. I made $75,000 on Upwork last year (my first year freelancing full-time) and I owe $18,000 in taxes plus $800 in penalties.

I had NO IDEA I was supposed to pay taxes quarterly. I thought freelancers just filed once a year like W-2 employees. Now I'm scrambling to come up with $18K.

Questions:

• How much should I have been paying quarterly?
• Can I negotiate the penalties since this was my first year?
• What deductions am I allowed to take to reduce this?
• How do I calculate quarterly payments for 2024 so this doesn't happen again?

Feeling really stupid right now. Why doesn't Upwork warn people about this?

Don't feel stupid - this catches almost every new freelancer. Here's the breakdown:

What happened: When you're self-employed, you owe both income tax (~15-24% depending on bracket) AND self-employment tax (15.3% for Social Security + Medicare). On $75K, that's roughly:

• Self-employment tax: ~$11,000
• Federal income tax: ~$7,000-9,000
• California state tax (if LA = Los Angeles): ~$3,000-4,000

Quarterly payments: You should have been paying approximately $4,500-5,500 per quarter. The IRS wants payment as you earn.

The penalties: You can request first-time penalty abatement if you have a clean history. File Form 2210 and write a letter explaining this was your first year as a freelancer.

For 2024, use a gig worker tax calculator to estimate your quarterly obligations based on your expected income.

The deductions can really help. Things you can write off:

• Home office (if you have dedicated space)
• Internet and phone (business percentage)
• Computer equipment and software
• Upwork fees (all $7,500+ you paid them!)
• Professional development (courses, books)
• Business insurance
• Retirement contributions (SEP IRA can be huge)

Did your tax preparer account for all of these? If not, amend your return. These deductions could easily save you $3-5K.

@TaxAccountant_SF - I used TurboTax self-employed version but I don't think I caught all deductions. Should I hire someone to review?

@FreelancerBoss - I claimed home office and internet but didn't know about the Upwork fees! That's huge.

Setting up a payment plan with IRS today. They said I can do $800/month.

YES hire a CPA to review. My first year I used TurboTax and left $6,000 on the table in deductions. A CPA charged me $400 and found $6K more in write-offs. 15x ROI.

Also, for 2024, set aside 30% of every payment immediately. Open a separate savings account called "Tax Savings" and transfer 30% there the day you get paid. Treat it like it doesn't exist.

Pro tip that saved me thousands: open a Solo 401(k) or SEP IRA. You can contribute up to 20-25% of your net self-employment income.

On $75K income, you could contribute ~$15K to a SEP IRA, which reduces your taxable income to $60K. That would have saved you about $5,000 in taxes.

You can still do this for 2024 if you haven't filed yet! SEP IRA contributions for 2024 can be made until your tax filing deadline (April 15, 2024 or your extension date).

@FreelanceNewbie_LA - Definitely hire a CPA for a review, especially since you're within the amendment window. The SEP IRA suggestion from @RetirementDude is excellent.

For quarterly estimates in 2024, here's the schedule:

• Q1 (Jan-Mar income): Due April 15
• Q2 (Apr-May income): Due June 15
• Q3 (Jun-Aug income): Due September 15
• Q4 (Sep-Dec income): Due January 15, 2024

Calculate 25-30% of your net income after expenses each quarter and pay via IRS Direct Pay or EFTPS.

UPDATE: Hired a CPA to review my return. Found $8,400 in additional deductions I missed (mostly business expenses, mileage, and a portion of my cell phone).

New tax owed: $10,600 instead of $18,000. Still a lot but way more manageable.

Also opened a SEP IRA and contributed $12,000 which dropped my bill to $8,100.

Lesson learned: always hire a professional for your first year. The $500 CPA fee saved me $10,000.

Thank you SO much for this thread. I just started freelancing on Upwork in January and had no idea about quarterly taxes. Just set up a seperate savings account and starting transfering 30% of every payment like DigitalMarketer_Pro suggested.

Also found the upwork tax calculator super helpful for estimating what I'll owe. Wish Upwork made this more obvious during onboarding tbh

Quick question - does the SEP IRA contribution deadline apply if I file for an extension? My accountant mentioned I could have until October to contribute for 2024 if I extend. Is that right?

Also curious if anyone here has compared Solo 401k vs SEP IRA? Trying to figure out which makes more sense for someone making ~$80k on Upwork.

@JennyWorks_Remote yes thats correct - SEP IRA contributions can be made up until your filing deadline including extensions. So if you extend to October 15, you have until then to contribute for 2024.

Re: Solo 401k vs SEP - at $80k they're pretty similar, but Solo 401k lets you do employee deferrals ($23k in 2024) PLUS employer contributions. More paperwork tho. At $80k income I'd probably stick with SEP for simplicity unless you want to max out contributions.