Quarterly Estimated Taxes: What You Should Know if You’re Self-Employed
Written by
Melanie Grafil, AI Editor
Edited by
Melanie Grafil
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As a self-employed individual, filing taxes can sometimes feel like trying to find your way through a maze, blindfolded. But it doesn’t have to be so daunting. Understanding your tax obligations when it comes to quarterly estimated taxes can make the journey much smoother and help you avoid those surprise tax bills that no one likes.
Here’s a guide to what you should know about quarterly taxes, especially if you’re steering the ship of your own business venture.
See: What To Do if You Owe Back Taxes to the IRS
What Are Quarterly Taxes?
When you’re self-employed, the IRS expects you to pay taxes as you earn or receive income during the year, known as estimated tax payments or quarterly taxes. This system is different from being an employee, where taxes are withheld from each paycheck by your employer. Essentially, if you’re your own boss, you’re also your own tax collector.
The heart of this process involves paying quarterly estimated taxes, which cover your income tax, self-employment tax and any other taxes you might owe. The IRS quarterly payments are due four times a year, and there’s a quarterly tax schedule to keep track of:
- April 15 (for January 1 to March 31)
- June 15 (for April 1 to May 31)
- September 15 (for June 1 to August 31)
- January 15 of the following year (for September 1 to December 31)
If these dates fall on a weekend or holiday, the due date is the next business day.
Why Pay Taxes Quarterly?
Paying taxes due quarterly helps spread the financial impact over the year, making it more manageable than facing a large bill at tax time in April. It also keeps you in the IRS’s good graces by avoiding underpayment penalties.
How To Calculate What You Owe
Calculating your quarterly estimated taxes involves estimating your adjusted gross income, taxable income, taxes, deductions and credits for the year. Using a self-employment tax estimator tool or consulting with a tax professional can help simplify this process. The aim is to pay enough to cover your tax liability for the year or at least 90% of what you owe for the current year, or 100% of what you owed the previous year (110% if your adjusted gross income is more than $150,000).
An Example for Calculating Your Taxes Owed
Let’s say your net income for the year is $50,000. Here’s a simplified calculation:
- Self-employment tax: $50,000 x 0.153 = $7,650
- Estimated income tax: (assuming a 20% tax bracket) $50,000 x 0.20 = $10,000
- Total estimated tax: $7,650 (self-Employment Tax) + $10,000 (Income Tax) = $17,650
- Quarterly estimated tax payment: $17,650 / 4 = $4,412.50 per quarter
Remember, this is a simplified example. Your actual tax rate, deductions and credits can significantly affect the amount you owe, as well as the potential to receive a tax refund. It’s always a good idea to use a self-employment tax estimator or consult with a tax professional for a more accurate calculation tailored to your specific situation.
How To Avoid Surprise Tax Bills
To steer clear of unexpected tax bills:
- Keep accurate records of your income and expenses. This practice not only aids in calculating your quarterly taxes but also ensures you’re taking advantage of all allowable deductions.
- Save for taxes in a separate bank account to avoid the temptation of using these funds for other expenses.
- Review and adjust your payments if your income increases or decreases. This flexibility is one of the advantages of the quarterly estimated tax system.
Tools and Resources
The IRS provides forms and publications that guide you through the process of calculating your estimated tax payments. Form 1040-ES, “Estimated Tax for Individuals,” is particularly useful, including a worksheet to help you figure out your estimated tax. Additionally, the IRS website and various third-party apps offer self-employment tax estimators to assist you in crunching the numbers. If you have other tax questions as well, such as on the FICA tax rate or the capital gains tax rate, it would be a good idea to speak with your tax advisor or accountant so that you have all the information you need at the ready.
Penalties for Underpayment
Falling short of your tax obligations can lead to penalties. The IRS calculates penalties based on the amount you should have paid each quarter, not just the amount you end up owing at the end of the year. That’s why it’s important to make accurate calculations and timely payments. However, if you did underpay, don’t panic. You might avoid penalties if you owe less than $1,000 in tax after subtracting your withholdings and credits, or if you paid at least 90% of the tax for the current year or 100% of the tax shown on the return for the previous year.
Final Take
Paying quarterly estimated taxes might seem like a hassle, especially when you’re busy running your business. However, with a bit of planning and organization, it becomes a manageable part of your financial routine. By understanding the quarterly tax schedule, calculating what you owe and setting aside money for taxes, you can avoid surprises and penalties. Remember, it’s about staying ahead of the game and keeping your financial health in check. So, take a deep breath, and dive into the world of quarterly taxes with confidence. After all, being well-informed and prepared is half the battle won.
Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.
