What You Need to Know About Quarterly Tax
Just the thought of having to pay taxes is stressful and unpleasant for most of us. However, when you start your own business and become self-employed, your tax responsibilities become even more complicated. You have to manage and keep track of all your business expenses, and pay self-employment taxes, which include Social Security and Medicare taxes, on top of your yearly income taxes based on your business profits and other income you’ve earned.
If you were previously an employee of a company, you had the luxury of your employer automatically withholding taxes from each paycheck. But now that you are self-employed, it’s a whole different ballgame when it comes to tax responsibilities, and you need to take on the burden of all these new tax obligations, which previously were not a concern.
One big tax responsibility for self-employed individuals is quarterly taxes, also known as estimated tax payments. Let’s take a closer look at what exactly are quarterly taxes, who needs to file them, how to calculate payments, when they’re due, which form to use, and how to go about paying it.
What are Quarterly Taxes?
All untaxed money received, whether it is from a client, freelancing project, investments, alimony, rent from owned property, or prizes won, it is required that taxes are paid to the IRS on this income, close to when the payments are received, in the form of quarterly payments throughout the year.
If quarterly taxes are not paid throughout the year, according to the IRS’s timetable on when they are due, one would have to pay penalties and interest when filing their yearly tax return in April.
Some advantages and disadvantages come with estimated tax payments. The top benefit is that you are spreading out what you would typically owe to Uncle Sam for the full year, by paying four smaller amounts, instead of one large lump sum in April, which can affect your business cash flow. The most significant disadvantage is that you need to file more paperwork more often with the IRS, instead of just doing it once a year around tax time.
Who Needs to File Quarterly Taxes?
It’s essential to determine if you’re responsible for paying estimated taxes quarterly, so you can avoid the penalties that come with not paying it. According to the IRS, this is who needs to pay:
“Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.”
There is one exemption to having to pay quarterly taxes, even if you are self-employed. If you had zero tax liability for the previous year, as long as it covered a 12-month period, and you were a U.S. citizen or resident for the full year, then you are not required to make estimated tax payments in the current year.
How are the Quarterly Taxes Calculated?
To accurately calculate what your quarterly tax payment should be, you’ll need to determine your estimated taxes for the entire year. To do this, you’ll need to figure out your expected adjusted gross income, taxable income, taxes, deductions, and credits. It can also be helpful to use your income, deductions, and credits from the prior year as a guide. Once you have an idea of what your total estimated tax liability will be for the entire year, divide that amount by four, and send in equal payments according to the IRS quarterly tax payment schedule.
Additionally, Form 1040-ES has a worksheet to help determine your estimated taxes. If you overestimate your earnings, simply complete another Form 1040-ES worksheet to recalculate your estimated tax for the next quarter. If you underestimate your earnings, again complete another Form 1040-ES worksheet to recalculate your estimated tax for the next quarter.
To avoid potential penalties, it’s important to estimate your income as accurately as possible. Adjustments must also be made for any changes in your own situation and for any recent tax law changes. However, as long as you pay 100 percent of the previous year’s taxes, you should be safe from penalties, assuming the quarterly tax payments were made on time. If you end up overpaying, you’ll receive a tax refund at the end of the year. Therefore, it’s better to be safe than sorry, as it will all balance itself out in the end.
When are Quarterly Taxes Due?
Make sure to pay estimated taxes on time. If you don’t, you may be subject to a penalty for a particular quarter because the estimated tax payment was received late. This penalty still applies even if you are eligible for a refund because you overpaid the total taxes due for the year.
The four estimated tax payments are usually due each year on the 15th of April, June, September, and January. If that date falls on a weekend or federal holiday, the filing deadline is pushed to the following business day.
What IRS Form is Used to File Quarterly Taxes?
If you’re a contract worker, you should receive a Form 1099 from each business client that has paid you at least $600 during the tax year. Also known as an “Information Returns Form,” it provides the IRS with a record of your income for the year. If you’re a freelancer, you may have multiple 1099 forms from various employers, and it’s important to take them all into account when calculating estimated payments.
Other IRS forms may be required depending on the type of business entity you’re filing under. If you’re registered as a sole proprietor, LLC, S corp shareholder or a self-employed individual, you must use Form 1040-ES to submit quarterly estimated tax payments. For other types of corporations, Form 1120-W must be used to file quarterly taxes.
What are the Payment Options for Quarterly Taxes?
The IRS wants the money that’s owed to them – paid on time – and therefore, makes it very easy for taxpayers to make payments through several different methods. You can choose to make your quarterly estimated tax payments using one of the following options.
- Pay Online. Paying online is convenient, secure and fast. You can use IRS Direct Pay which automatically transfers payment from your bank account, pay by debit or credit card, or agree to an electronic fund withdrawal (EFW) while filing taxes electronically through tax preparation software. You can also apply for an online payment agreement to make monthly installment payments if you cannot pay the full amount at the time of filing.
- Pay by Phone. Paying by phone is also a safe and secure method. There are two ways to pay this way. You can use the Electronic Federal Tax Payment System (EFTPS) but must be enrolled first. Or, you can call one of the IRS service providers listed on Form 1040-ES to pay by debit or credit card.
- Pay by Mobile Device. You can make payments through your mobile device by downloading the IRS2Go app.
- Pay by Mail. Although not preferred by the IRS because it’s not as secure as the electronic options, you can mail in a check or money order made payable to “United States Treasury,” along with the estimated tax payment voucher. Where to send your payment depends on what state you live in, and you can find the full list of addresses listed on Form 1040-ES.
- Pay by Cash. You can also pay by cash, in-person. But given all the other safe, fast and convenient options you have to pay, and that it is 2018, we’ll pass over this option.
If you are behind on tax payments, learn how to setup an IRS Payment Plan?
Remember, one of the best ways to prepare for quarterly taxes and estimate your taxable yearly income is to keep track of all your business expenses with well-kept records of each one. The more deductions you have, the lower your taxable income will be, and the less you’ll owe to the IRS.
Everlance is the #1 app business owners use for tracking company mileage & expenses. This convenient and time-saving offering captures all of your receipts, car mileage and business expenses, and provides all the data when you need it on an easy-to-use Dashboard. When preparing taxes, just download all mileage and expense reports, and hand it over to your accountant or import it directly into your tax preparation software.
Filing taxes is never fun, especially if you have to do it four times a year through quarterly taxes, but using Everlance can undoubtedly make the process more tolerable and help you find an average of $6,500/yr in deductions.