What is Estimated Tax Payment? Understanding the Reality of Unexpected Tax Bills
“I received a notice from the tax office that I don't recognize.” “Do I have to pay this estimated tax?”
Many freelancers in their first or second year are surprised by this. You feel relieved after finishing your tax return, only to receive another tax bill. And the amount is significant.
It's not scary once you know what it is. Let's break it down step by step.
What is Estimated Tax Payment?
Estimated tax payment is a system for prepaying this year's income tax.
If the income tax you paid in the previous year's tax return was 150,000 yen or more, you are required to pay this year's income tax in installments in advance.
The reason for prepaying is so the government can receive tax revenue steadily throughout the year. Unlike company employees, freelancers do not have taxes deducted monthly, so this system compensates for that.
Payments are made twice a year.
・July (1st installment): One-third of the previous year's income tax ・November (2nd installment): One-third of the previous year's income tax
The remaining one-third is settled during the tax return filing in March of the following year.
An idea of the specific amounts
For example, if you paid 300,000 yen in income tax in your previous year's tax return, you will be subject to estimated tax payments.
・Pay 100,000 yen in July ・Pay 100,000 yen in November ・Settle the remaining amount in the tax return in March of the following year
In this case, a total of 200,000 yen goes out in July and November. The feeling that “another bill arrived even though I finished my tax return” is caused by this timing gap.
How to check if you are eligible
You are subject to estimated tax payments if your declared tax amount from the previous year (income tax paid in your tax return) is 150,000 yen or more.
Freelancers are often not subject to this in their first year, but it is common to suddenly become subject to it from the second or third year onwards as sales increase.
A “Notice of Estimated Tax Payment Amount” will be sent from the tax office around June. Once this notice arrives, you must pay the first installment by the end of July.
You can apply for a reduction
If you feel that “it is difficult to prepay based on last year's amount because my sales have dropped this year,” you can apply for a reduction.
This is a procedure to have the amount reduced to a figure recalculated based on this year's projected income.
・Deadline for 1st installment reduction application: July 15th ・Deadline for 2nd installment reduction application: November 15th
Please actively utilize this if you anticipate a drop in income due to poor health, parental leave, or a significant decrease in sales.
The application form can be downloaded from the National Tax Agency website. It is also possible to submit it online via e-Tax.
What happens if you don't pay?
Estimated tax payment is mandatory. If you miss the deadline,delinquent taxwill be incurred.
Delinquent tax is charged at an annual rate based on the number of days past the payment deadline. Since many cases involve people who "received the notice but forgot about it," I recommend adding the payment deadline to your calendar as soon as the notice arrives in June.
Why cash flow management is important
The biggest problem with estimated tax payments iswhen you don't have cash on hand.
Even if you have sales coming in, your account balance may be low due to expense payments and living costs. When a bill for 100,000 or 200,000 yen arrives on top of that, your funds will temporarily become tight.
The solution is simple. Set aside a certain percentage (a guideline is 20-30%) of your monthly sales in a separate account for taxes. Doing just this will prevent you from panicking over estimated tax payments, resident taxes, and final tax returns.
It is also effective to ask an AI, "If my monthly income is XX yen, how much should I save each month?" It will provide you with a rough estimate.
Summary: Remember these 3 points
Estimated tax payment is a system for prepaying this year's income tax that occurs ifyour previous year's income tax was 150,000 yen or more
Payments are made twice a year inJuly and November, and delinquent tax is charged if you miss the deadline
If your income is likely to drop this year, utilize thereduction application (the 1st installment deadline is July 15th)
Estimated tax payment is not a "sudden bill" but a "prepayment mechanism." If you understand the system, you can deal with the notice without panicking when it arrives.
In the next article, I will explain "How to claim the 650,000 yen blue return deduction in the AI era."