Most people think of taxes as something you do once a year, but if you’re a freelancer or a business owner, you’re required to pay taxes every quarter, as well as file a return annually.
Also known as estimated taxes, quarterly taxes require you to estimate how much you will make in a year and pay taxes on that amount over the year. Many people find the quarterly tax system preferable since it allows you to “pay-as-you-go,” meaning you can spread out your tax obligations instead of getting hit with a tax burden all at once.
In this guide, we’ll walk through the important logistics and implications that come with paying quarterly taxes.
Who pays quarterly taxes?
Like we said before, if you’re a business owner or freelancer, you’ll likely pay taxes on a quarterly basis. To be more specific, if you’re self-employed and work as a business owner, independent contractor, sole-proprietor, partner in a business, or run a part-time business, you may be required to pay quarterly taxes.
If you file as an S Corp, sole proprietor, partnership, or self-employed individual, and you owe taxes of $1000 or more on your return, you are required to pay quarterly taxes. If you’re filing as a corporation, and you expect to pay $500 or more when you file your return, you’re also required to pay quarterly taxes.
Note: If you are a sole proprietor or a part of a partnership/LLC and the above criteria applies to you, you are required to pay self-employment tax in addition to income tax throughout the year. Employment tax is 15.3% of your net income and covers social security and medicare taxes.
When do you pay quarterly taxes?
Quarterly taxes are due four times a year — April, June, September, and January.
Generally, your quarterly taxes are due:
- April 15
- June 15
- September 15
- January 15 (the following year)
If these days fall on a weekend or a holiday, quarterly tax payments are due the following business day.
How to calculate quarterly taxes?
As a general rule of thumb, It is recommended that you put 25% to 30% of your income aside to pay quarterly taxes. When calculating quarterly taxes, you must consider your expected adjusted gross income, your taxable income, taxes, deductions, and credits for the year. It also is helpful to look at your previous year’s tax return, as well as quarterly payments you’ve already made for the year.
First, Calculate Your Taxable Income
Say you’re running a corporation and you expect to make $85,000 this year. Once you subtract your above-the-line deductions (A.K.A. all your deductions that appear above the line where you’re required to enter your adjusted gross income on your return) from your expected income, you might end up with $75,000. This new number is your adjusted gross income.
Now, look at subtracting your standard deduction. Standard deductions vary year to year, but in 2019, the standard deductions are as follows:
- Single — $12,200
- Married Filing Jointly & Surviving Spouse — $24,400
- Married Filing Separately — $12,200
- Head of Household — $18,350
For this example, we will categorize you as single. In this case, your deduction would be $12,200. Once you subtract $12,200 from your adjusted gross income ($75,000), you get your taxable income: $62,800.
Second, Calculate Your Income Tax
Now, it’s time to look at your tax bracket. Like standard deductions, tax brackets also vary from year to year, so it’s important to double-check you have the right numbers.
In 2019, the tax bracket says the rate for individuals making taxable income at $62,800 is 22%. This means that you are estimated to owe $13,816 in income taxes for the year.
Lastly, Find Your Amount Due Each Quarter
Once you have your quarterly taxes for the year estimated, simply divide that number by four to get the amount due each quarter. In this case, you would owe $3,454 each quarter.
$13,816/4 = $3,454 (quarterly tax amount due)
Note: If you are a sole proprietor or a part of a partnership/LLC, you would need to add your self-employment tax to your estimated income taxes, and then divide that total by four to get your tax amount due each quarter.
How to pay quarterly taxes?
In order to pay your quarterly taxes, fill out the Form 1040-ES, or the Form 1120-W if you’re a corporation, and mail it in to the IRS. These forms also provide a useful worksheet to calculate your quarterly taxes for the year.
If you would prefer not to mail in your tax payments, you can also pay online.
What happens if you don’t pay quarterly taxes?
If you don’t pay enough tax throughout the year, you may face penalties from the IRS for underpayment. If you are penalized, you will be sent the Form 2210 from the IRS to figure the amount of the penalty.
While the IRS has penalties for not paying, they also understand that the income associated with freelancing and owning a business might be hard to estimate. In turn, they created a safe harbor rule to give people some leeway if they fall short on their quarterly payments.
Safe Harbor Rule
The safe harbor rule for quarterly taxes essentially says if you’re slightly over or close to your total quarterly taxes amount, you won’t get penalized.
More specifically, you won’t get penalized if:
- You expect to owe less than $1000 after taking out your withholding and credit
- If you pay 100% of your tax liability for the previous year or at least 90% of the tax due for the current year, whichever is smaller
It’s important to note that if your income is more than $150,000, you’re required to pay 110% of what you paid last year.
Quarterly taxes can be beneficial for small business owners, but that doesn’t mean they are super intuitive. It takes some calculated steps and organization to ensure you can estimate your quarterly taxes year over year.
If you’re still feeling a bit lost, consult an expert! An expert give you the resources and tools you need to feel confident going into tax time. For more tax guidance, check out our other tax blogs and guides!
Senior Tax Accountant