If you work for yourself, quarterly taxes are part of the business plan—yet they remain one of the more “mysterious” tax obligations. If this was your first year working for yourself, you probably have many questions about your estimated quarterly taxes. Your estimated tax payments may also look different if you’re suddenly making more as a self-employed person or freelancer this year.
That’s exactly why we’ve put together this guide. Read on to learn more!
What Are Estimated Taxes?
Your estimated tax payments are quarterly payments that you make to the IRS if your income isn’t already subject to withholding taxes. You will make four payments each year based on how much tax you anticipate owing for the year. If you’re employed by someone else, your withholding taxes are removed from each paycheck based on the W-4 that you submitted to your employer when you were hired.
Who Has to Pay Estimated Taxes?
Self-employed people and freelancers have to pay the self-employed quarterly tax. The requirement, however, extends to anyone who earns income that is not subject to withholding taxes. While estimated tax payments are usually thought of in terms of wages, they can also apply for interest, dividends, alimony, capital gains, prizes, awards, or rental income.
How Do Estimated/Quarterly Taxes Work?
The IRS estimates your tax liability for the current year based on the previous year’s tax liability. As a result, you’ll need to pay your estimated quarterly taxes based on what you earned in income last year. Here’s a rundown of the basics of paying quarterly taxes:
- You’re a self-employed person expecting to incur a minimum $1,000 tax liability for the year.
- Your earnings from a company ownership or partnership will create a tax liability exceeding $500.
- If you make more this year than you did last year, you won’t be penalized if your estimated tax payments are lower than necessary as long as they cover 100 percent of last year’s taxes. You will still need to make up the difference before the tax deadline for the year.
- If you make less this year than you did last year, you will receive a refund for the excess taxes you’ve paid.
How do you figure out estimated quarterly taxes for the first time? You’ll need to determine your expected adjusted gross income for the taxable year to determine your taxable income accurately. You can also factor in deductions and credits.
Do I Need to File Estimated Taxes?
If you’re earning income from a source other than an employer, you’ll need to make an IRS estimated tax payment four times per year. However, you may be exempt from paying quarterly taxes if you meet three conditions. Here’s a look:
- You had no tax liability last year.
- You were a U.S. citizen or resident for the whole year.
- Your prior tax year covered a 12-month period.
This essentially means that you may not need to worry about quarterly tax payments if you’re a self-employed person who was not required to pay taxes last year. That doesn’t necessarily mean you’ll want to skip quarterly tax payments, though. If you make enough, you’ll still be liable for taxes on income earned for the current year, even if you aren’t required to make quarterly payments. Sending in quarterly payments can be a good way to stay on track with what you owe the IRS instead of receiving a large tax bill at the end of the year.
When Are Quarterly Taxes Due?
Quarterly taxes are due four times per year. The IRS breaks the year up into four payment periods with specific due dates. Your final payment for the year isn’t due until January of the next year. Here’s a look at the IRS’s payment schedule for quarterly tax payments:
- Jan. 1 to March 31: April 15 (Tax Day).
- April 1 to May 31: June 15.
- June 1 to Aug. 31: Sept. 15.
- Sept. 1 to Dec. 31: Jan. 15 of the following year.
Most people generally follow the previous year’s income pattern to determine how much to pay for each quarter. You may, however, be able to reduce payments if certain quarters are “slow” without coming in below your tax obligation if you’re certain that your year-over-year income will be lower for this tax year.
Keep in mind that it’s often considered better to overpay if you’re doing your own taxes without the help of a tax professional. Miscalculating could mean that you’re stuck with penalties for underpayment.
Is There a Penalty for Not Paying Quarterly Taxes?
Yes, taxpayers are penalized for not paying quarterly taxes if they are required to pay quarterly taxes. Generally, you are required to pay either 90 percent of total taxes owed or 100 percent of the tax shown on the prior year’s return. Your underpayment penalty for quarterly taxes increases for each full month that you don’t pay before capping out at 25 percent of the taxes owed.
How to Pay Quarterly Estimated Taxes
The IRS provides several ways to pay your estimated quarterly taxes. The most basic way is to make payments by mail using Form 1040-ES. You can also pay online, over the phone, or via the IRS2Go app.
Get Help With Your Quarterly Taxes
The self-employed quarterly tax is a complicated issue because it’s one area where the IRS isn’t very forgiving. If you’re subject to quarterly taxes this year, make sure you don’t miss an IRS estimated tax payment with help from the professional at Tax Group Center. We’ll help you stay on track with estimated tax payments for your personal income or business income to avoid a surprise tax bill with penalties. Contact us today!