Quarterly Taxes: Self-employed Taxes Explained + Definition

Learn all about quarterly taxes and how they apply to self-employed individuals.

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The concept of quarterly taxes, particularly in relation to self-employment, is a topic that can often seem complex and daunting. However, with a thorough understanding of what these taxes entail, how they are calculated, and when they are due, the process can become much more manageable. This glossary entry aims to provide a comprehensive explanation of quarterly taxes for self-employed individuals, breaking down the various aspects involved in a clear and detailed manner.

As a self-employed individual, it's important to understand that you are essentially your own business. This means that you are responsible for managing your own tax obligations, which can include paying taxes on your income on a quarterly basis. These are known as estimated tax payments, and they are used to cover income tax, self-employment tax, and potentially the alternative minimum tax.

Understanding Self-Employment

Before delving into the specifics of quarterly taxes, it's crucial to first understand what constitutes self-employment. In the simplest terms, you are considered self-employed if you conduct a trade or business as a sole proprietor, an independent contractor, a member of a partnership, or if you are otherwise in business for yourself. This can include both full-time and part-time work.

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As a self-employed individual, you are essentially both an employer and an employee. This means that you are responsible for paying both the employer and employee portions of the Social Security and Medicare taxes, which is known as the self-employment tax. This is in addition to the regular income tax that all individuals are required to pay.

Self-Employment Tax Rate

The self-employment tax rate is currently set at 15.3%, which is comprised of 12.4% for Social Security and 2.9% for Medicare. However, it's important to note that the Social Security portion only applies to the first $142,800 of your combined wages, tips, and net earnings in 2021. Any income above this amount is only subject to the Medicare portion of the tax.

It's also worth noting that if your net earnings from self-employment exceed $200,000, you may be subject to an additional 0.9% Medicare tax. This is known as the Additional Medicare Tax, and it does not have a wage base limit.

Reporting Self-Employment Income

As a self-employed individual, you are required to report your income and expenses on Schedule C (Form 1040), Profit or Loss from Business. This form is used to calculate your net profit or loss from your business, which is then reported on Form 1040, U.S. Individual Income Tax Return.

If your expenses are less than $5,000, you may be able to file Schedule C-EZ instead of Schedule C. However, there are certain restrictions that apply, so it's important to review the instructions for both forms to determine which one is appropriate for your situation.

Understanding Quarterly Taxes

Now that we have a basic understanding of self-employment and the associated tax obligations, let's delve into the specifics of quarterly taxes. As mentioned earlier, these are estimated tax payments that you make on your income throughout the year. They are called 'quarterly' taxes because they are typically due four times a year, on specific dates set by the IRS.

The purpose of these payments is to cover your tax liability for income that is not subject to withholding, such as self-employment income, interest, dividends, alimony, and rental income. If you do not pay enough tax through withholding or estimated tax payments, or if you do not pay on time, you may be charged a penalty.

Calculating Quarterly Taxes

Calculating your estimated tax payments can be a complex process, as it involves estimating your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. The IRS provides a worksheet in Form 1040-ES, Estimated Tax for Individuals, to help with this calculation.

It's important to note that your estimated tax payments should be based on your current year's income, not your previous year's income. However, if you have no idea what your income will be for the current year, you can base your estimated tax payments on 100% of your previous year's tax liability (110% if your adjusted gross income was more than $150,000).

Paying Quarterly Taxes

Once you have calculated your estimated tax payments, you can pay them in several ways. You can mail a check or money order to the IRS, pay online using the IRS's Electronic Federal Tax Payment System (EFTPS), or pay by credit or debit card through an approved payment processor.

It's also worth noting that you do not have to make estimated tax payments if you expect to owe less than $1,000 in tax after subtracting your withholding and refundable credits, or if you had no tax liability in the previous year.

Quarterly Tax Deadlines

The deadlines for making estimated tax payments are typically April 15, June 15, September 15, and January 15 of the following year. However, if any of these dates fall on a weekend or holiday, the deadline is extended to the next business day.

It's important to note that these deadlines are for the calendar year, not the fiscal year. This means that the first payment is for the first quarter of the year (January through March), the second payment is for the second quarter (April and May), the third payment is for the third quarter (June through August), and the fourth payment is for the fourth quarter (September through December).

Penalties for Late Payment

If you do not pay enough tax through withholding or estimated tax payments, or if you do not pay on time, you may be charged a penalty. The penalty is calculated separately for each installment, so you may owe a penalty for an earlier installment even if you paid enough tax later to make up the shortfall.

The penalty is typically 0.5% of the unpaid amount for each month or part of a month that the tax is unpaid, up to a maximum of 25%. However, the rate may be lower if the IRS issues a notice of intent to levy.

Exceptions to the Penalty

There are certain exceptions to the penalty for underpayment of estimated tax. For example, you will not owe a penalty if you did not make a payment because of a casualty event, disaster, or other unusual circumstance and it would be inequitable to impose the penalty.

Additionally, you will not owe a penalty if you retired after reaching age 62 or became disabled during the tax year or in the preceding tax year, and you had a reasonable cause for not making the payment.

Conclusion

Understanding and managing your tax obligations as a self-employed individual can be a complex process, but with a thorough understanding of the concepts and requirements involved, it can become much more manageable. By staying informed and planning ahead, you can ensure that you meet your tax obligations and avoid any potential penalties.

Remember, this glossary entry is intended to provide a general overview of the topic and may not cover all the specifics of your individual tax situation. If you have any questions or concerns about your tax obligations, it's always a good idea to consult with a tax professional.

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