On the surface, quarterly taxes are simple. If you owe taxes that aren’t withheld, you’ll be responsible for paying those taxes in quarterly, estimated increments throughout the year. But the nuances of quarterly taxes, combined with the fact that not everybody has to deal with them, make them confusing to the unacquainted.
Whether you’re completely new to quarterly taxes, or you’re used to them (but you have a few questions), this article can help you clear things up.
Quarterly Taxes: The Basics
Let’s start with an entry-level explanation of what quarterly taxes are, and why they exist in the first place. In a typical employer-employee relationship, employers are responsible for withholding a specific amount of taxes from each employee’s paycheck. These tax revenues are generated regularly, providing income for the IRS.
If you’re self-employed, you won’t have an employer to do this work for you. In fact, when you’re paid, you probably won’t have taxes withheld from your paycheck at all. At the end of the year, when you file your tax return, you’ll need to account for the discrepancy between what you owed and what was withheld.
Rather than being paid in a single lump sum at the end of the year, the IRS prefers a steadier stream of income. This is both to help with cash flow and to increase the likelihood of taxes being paid. Accordingly, self-employed people are required to pay their yearly owed taxes to the federal government in quarterly installments.
In some cities and states, you’re also responsible for paying quarterly estimated taxes at the state and local level.
Who Will Be Responsible for Quarterly Taxes?
Not everyone is responsible for paying quarterly taxes. If you’re a sole proprietor, partner, S-corporation shareholder, or a self-employed person of any time, you’ll be responsible for paying quarterly taxes if you expect to owe $1,000 or more in taxes. In other words, if you’re making money that isn’t subject to withholding, and you’re going to owe more than a few hundred dollars in taxes, you’re going to need to make quarterly estimated payments throughout the year.
There’s one notable exception; if more than two-thirds of your annual gross income comes from farming or fishing, you’ll only need to make one estimated payment before January 15.
If you have no tax liability, or if you’re not currently self-employed, you won’t have to worry about quarterly payments.
Deadlines for Paying Quarterly Taxes
As the name implies, quarterly taxes are due once per quarter. There are specific deadlines to meet to provide your payment, and they’re always the same (with one simple exception):
- April 15.
- June 15.
- September 15.
- January 15.
If any of these dates fall on a weekend or a holiday, the due date will shift to the next weekday.
Estimating Your Quarterly Taxes
How are you supposed to estimate the quarterly taxes you’re going to owe?
The easiest way is to look at your previous year’s return. If you made $80,000 and owed $20,000, you can consider that $20,000 bill as your basis for consideration. If you think you’re going to make $80,000 again, with no major changes to your deductions or expenses, you can consider your total tax bill to be roughly $20,000; from there, you can split the amount into quarterly payments of $5,000 each.
Of course, if your income changes significantly, you’ll need to make adjustments. Don’t worry too much about precision; if you’re close, or if you make estimated payments in excess of what you actually owe, you won’t face any kind of penalty. For example, let’s say for most of the year, you’re on pace to make $80,000, but near the end of the year, you get a surprise job worth $20,000, increasing your income to $100,000. Proportionally, you can ballpark your total taxes owed to be $25,000, and you can increase your final quarterly payment by $5,000 to make up for the difference.
If you want an even more accurate estimate, rely on the calculation tables provided in Form 1040-ES.
Note that if you pay more in quarterly taxes than you end up owing at the end of the year, you’ll get whatever extra money you paid back in the form of a refund.
Because calculating your taxes can be difficult, it’s in your best interest to enlist the help of a seasoned tax professional. While your quarterly tax payments don’t need to be exact, they should be reasonably close.
Submitting Payment to the IRS
There are a few ways you can submit payment to the IRS. Try to submit your payment a day or two before the deadline.
- Use pre-printed vouchers and envelopes when appropriate.
- In some cases, your tax professional, your tax software, or the IRS themselves will send you a set of four pre-printed vouchers and envelopes you can use to submit your payments. If this is the case, you may have a suggested amount based on last year’s tax return; feel free to adjust this as needed throughout the year. Double-check that all your information is correct before submitting.
- Mail a check or money order with Form 1040-ES.
- Otherwise, you can
- , specifically designated for estimated tax payments. You can also use this worksheet to calculate your estimated taxes. When done, you can fill out a small slip with your personal information and the amount you’re enclosing. Send it, along with a check or a money order written to the U.S. Treasury, to an IRS branch near you.
- Submit your payment electronically.
- You may also be able to submit your quarterly tax payments electronically. If you do, you can pay with a credit card or debit card.
If you need to submit quarterly taxes to state and local governments, you’ll need to research local laws to determine where and how to submit payment.
What Happens If You Don’t Pay Quarterly Taxes?
If you don’t pay your quarterly taxes, or if you underpay, you’ll owe a small penalty, plus whatever amount of taxes you didn’t pay. The penalty will be imposed on each instance of underpayment, and calculated based on the number of days it remains unpaid. This penalty will often be 0.5 percent per month to your outstanding tax bill, which amounts to 6 percent per year. Additionally, you’ll owe a 3 percent interest charge, resulting in a total penalty of 9 percent per year. While this is good motivation to pay your quarterly taxes on time and in full, it’s also not devastating; if you underpay by $500 in January and file your taxes in March, your penalty will be something like $7.
If you continue to fail to pay your quarterly taxes, or if your tax bill remains unpaid for an extended period time, you could face increasingly harsh consequences, ranging from wage garnishment to jail time. However, these extreme penalties are rare, and typically reserved for malicious tax evaders.
Note that there are some exceptions that could waive your quarterly tax penalties. For example, if this is the first year in which you’ve owed quarterly taxes, your penalty could be entirely waived.
Accounting for Quarterly Taxes
For most people, the biggest hurdle is remembering to pay quarterly taxes—and saving enough money to account for it. Make sure you understand what you’re going to owe, and set aside enough money to account for your bill. It’s also important to remember your deadlines, so set automatic reminders to stay on top of things.
Managing your taxes as an independent contractor can be confusing and complicated, especially if you’ve never done it before. Whether you’re navigating quarterly taxes or just need to understand how self-employment taxes work, Taxfyle can help. Start your return with Taxfyle today, or keep reading our blog to learn more about taxes as an independent contractor.