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do I have to pay quarterly taxes? The simple guide

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Updated on:
December 12, 2022
December 12, 2022
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If you are a self-employed freelancer or business owner, you may need to make estimated tax payments if you meet certain requirements. Quarterly estimated tax payments are how self-employed taxpayers pay their taxes to the IRS throughout the year. These payments are made every three months and are meant to cover self-employment taxes or Social Security/Medicare, and income tax.

Employees don't have to pay taxes quarterly. That's because their employers withhold taxes from their paycheck before they even receive the money. If you have a W-2 full-time or part-time job, you'll typically receive a tax refund.

In this article, we'll go over who has to pay estimated taxes, the due dates, exceptions to the rule, and the penalties if you miss payments.

Note: if you don't want to miss quarterly tax deadlines and also track your business expenses, try Bonsai Tax. Our tax software will scan your bank/credit card receipts to discover potential tax write-offs and help you maximize your savings. Users usually save $5,600 from their tax bill with our software. Try a 7-day free trial today.

Who Has To Make Estimated Tax Payments?

Freelancers, independent contractors, and small-business owners who anticipate owing at least $1,000 in taxes, even after accounting for your withholding and refundable credits from their self-employed income, all need to pay quarterly taxes.

This is your taxable income or the part of a self-employed workers income used to calculate how much tax they'll owe Uncle Sam in a given tax year. For example, if your annual revenues is $45,000 and you claimed $15,000 in business deductions, your taxable income would be $30,000.

Even if their employers withhold taxes from their paychecks, people with rental income and assets may need to pay estimated quarterly taxes.

Self-employed individuals who owe less than that are able to pay their taxes when they file their annual tax returns. You must pay your taxes as you go under the law.

If you have not paid enough tax through withholding or quarterly estimated payments by the time you file your taxes, you may be subject to a penalty for underpayment. We'll go over this penalty rate later down below.

Remember, the quarterly tax payment are just an estimate. At the end of the tax year, you'll still need to file an annual tax return. It is best to consult with a tax professional to see if you'll need to file estimated tax payments.

Fishermen And Farmers

If certain special criteria are met, Fishermans and Farmers may need to pay estimated taxes. If farming or commercial fishing account for more than two-thirds of your taxable gross income, you qualify as a farmer or fisherman.

Simple Guidelines To Determine If You Need To Pay Estimated Taxes

According to the IRS, individuals, such as sole proprietors, partners, and shareholders in S corporations, may be required to make anticipated tax payments if:

  • When they file their annual return, they expect to owe tax of at least $1,000.
  • They had a tax debt from the previous year.

Some taxpayers may be required to make projected tax payments, such as those who:

  • Interest, dividends, alimony, capital gains, prizes, and awards are examples of non-employer income.
  • Had tax deducted from their wage or pension, but it is insufficient
  • Has more than one employment but does not have taxes withheld by each employer.
  • Os a sole proprietor.
  • Is a salesperson for a direct-sales or in-home-sales firm.
  • When they are not working as employees, they participate in sharing economy activities.

In short, you don't want to miss out on payments.

Taxes Self-Employed Folks Pay

In addition to annual tax returns, self-employed people are responsible for paying estimated quarterly taxes. A self-employed individual pay quarterly taxes to cover Social Security tax, Medicare tax and income tax.

In 2021, the tax rate is:

  • Self-employment tax rate: 15.3% (Social Security (12.4%) and Medicare (2.9%)

High earners who make over $200,000 may be subject to an additional Medicare tax.

What Happens If You Skip Payments?

If you are required to file quarterly tax payments and you forget or just decide to skip out on paying them, then you'll have to pay an underpayment penalty. In order to avoid paying an underpayment penalty, you'll need to make your payments on time and send in the proper amount. Here are the due dates for estimated taxes.

Due Dates For Quarterly Taxes

The quarterly deadlines are as follows:

  • April 15 - First quarter (January 1 – March 31)
  • June 15 - Second quarter (Aril 1 – May 31)
  • September 15 - Third quarter (June 1 – August 31)
  • January 15 of the following year - Fourth quarter (September 1 - December 31)

How To Calculate Quarterly Payments

After you see if you need to pay estimated quarterly taxes, the next step is to calculate and send in the proper amount to the IRS. If you expect to make a similar amount of income from the previous year, refer to your expected gross income from the previous year (companies gross revenue after you subtract business expenses). Of course, you'll want to change or adjust the amount based on what you expect to earn this year.

The formula to calculate your quarterly tax payments is fairly simple. Once you have your expected adjusted gross income, take your total tax liability for the year, including self-employment tax, income tax, and any other taxes, and divide that number by four.

You don't need to send 25% of the total you expect to owe in year instead of needing to estimate what you'll owe each quarter.

There are also many free online tools to help you calculate your payment totals. If you overpaid your quarterly taxes, you'll get a tax refund at the end of the year. Payments are reported via a Form 1040-ES. A From 1040-ES is a form that calculates the total taxable income of a taxpayer and determines how much is to be paid or refunded by the government. You can use IRS Form 1040-ES to figure and pay your estimated tax. Use the IRS 1040-ES worksheet if your income varies each year.

Estimated tax payments should be paid as soon as you start earning money as a self-employed worker. Again, they must be sent in by April 15, June 15, September 15, and January 15 of the following year.

If it is your first year self-employed, you won't need to pay quarterly taxes by withholding. However, if you believe you'll earn a lot of money, it would be wise to send in estimate payments so you won't be left with a big tax bill at the end of the year or on your April tax return.

Higher income taxpayers have different rules for quarterly taxes. If your adjusted gross income for the year is over $150,000, then you'll need to cover 110% in estimated taxes.

In order to avoid an estimated tax penalty, you'll have to pay at least 90% of your previous year's tax liability through withholding, estimated or additional tax payments or a combination of the two. If you don't, there may owe an estimated tax penalty when you file your tax return.

Penalties For Estimated Taxes

If you skip out on quarterly tax payments, you'll have to pay an estimated tax penalty. The penalty amount will accrue based on how late you are and how much you make. Essentially, the IRS will add a penalty of .5% of the tax owed after the due date. This penalty amount will continue to accrue from the day your quarterly payment is due until the day it is paid. There is a penalty limit of 25% of the taxes owed.

Typically, taxpayers don’t have to pay a penalty if they meet any of these conditions:

  • They owe less than $1,000 in tax with their tax return.
  • Throughout the year, they paid the smaller of these two amounts:
  • at least 90 percent of the tax for the current year
  • 100 percent of the tax shown on their return for the prior year – this can increase to 110 percent based on adjusted gross income

For example, let's say you paid $5,000 in taxes last year. You'll send in equal payments of $1,250 this year. However, if you calculate your taxes at the end of the year to actually be $7,000, you'll need to pay the difference of $2,000 at tax time to avoid a penalty.

If it turns out that you overestimated or underestimated your earnings, you can always recalculate your estimated tax for the next quarter by completing another Form 1040-ES.

You'll most likely need to attach an extra form — IRS Form 2210 — to your annual return to explain why you didn't send equal quarterly payments.

A sure-fire way to avoid penalties is to pay for 100 percent of your previous year's taxes by each of the quarterly deadlines.

IRS Approved Exceptions For Missing Deadlines

There are certain circumstances where the IRS might give you a break on penalties. Let's review some of the exceptions for missing payments for estimated quarterly taxes.

  • If you were a victim of a casualty, disaster or other unusual circumstance
  • If you’re at least 62, retired or became disabled this year or last year and your underpayment was due to “reasonable cause” rather than neglect.

How To File Estimated Quarterly Taxes

The IRS has made it really easy to send in estimated payments throughout the year. You can select a payment method via the IRS website or mail in a check with your Form 1040-ES.

Just use the Electronic Federal Tax Payment System (EFTPS) to submit payments electronically.

You could also mail in a Form 1040-ES.

Read our full detailed guide for how to send quarterly tax payments.

If you are a small business owner who has questions about filing or sending in estimated tax payments, we always recommend you consult with a tax professional.

They can help you file Form 1040-ES, set up automatic withholding from your bank account and answer any tax questions to keep you in line with the IRS's rules. A designated CPA or accountant can help you with your specific tax situation.

Never Miss An Estimated Tax Deadline Again

Estimated taxes are meant to help business owners to prepare to pay their tax duties. If you want an app to help you record all your tax receipts and remind you of your quarterly tax deadlines (so you don't have to pay unnecessary penalties), then try Bonsai Tax.

Our app can help you estimate your self-employment income tax, send you important filing reminders, and maximize your tax deductions.

Users typically save $5,600 with our app. Try a 7-day free trial today.

This article is meant to be a resource. Tax laws are always changing. If you have any questions about self-employment tax rates, quarterly estimated tax payment totals, or if you need to pay estimated taxes in the first place, we always recommend you talk to a tax advisor. A CPA or accountant can help you answer any estimated tax questions and help you properly file your tax return.

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