What Are Quarterly Taxes?
There are many benefits to being self-employed — like never having to spend time getting a report done for your boss and setting your own work hours. However, it also comes with additional requirements like having to pay your income taxes quarterly rather than with each paycheck as with employment taxes.
In other words, if you earn income as an independent contractor, you’ll need to take care of your own taxes. This could also mean that you may have to settle your taxes on four separate days throughout the year depending on your adjusted gross income.
Quarterly taxes are divided into two categories.
The first is self-employment tax, which is a tax rate that consists of 12.4% for social security and 2.9% for Medicare taxes.
The second is income tax which requires individuals to pay estimated tax based on their income tax rate.
It’s important for self-employed individuals to set aside at least 25% of their employment income for taxes.
Who Pays Quarterly Taxes?
The Internal Revenue Service (IRS) requires independent contractors, small business owners, and freelancers to make estimated tax payments. Quarterly taxes are only for people who expect to owe at least $1,000 in taxes based on their income as self-employed persons.
Those who owe less than $1,000 don’t need to pay quarterly taxes. Instead, they can simply settle the taxes for their income when they file their tax return at year’s end.
There’s also an exception to this law. Individuals earning at least two-thirds of their income from fishing or farming will only pay two-thirds of their current year tax. They can also choose to pay 100% of their past year’s tax.
When you pay your taxes every quarter, you get to avoid the build-up of having to settle a huge amount of accumulated tax at once. You’ll also make it easier to pay your bills when you do quarterly settlements rather than facing a lump sum payment.
You can reach out to a tax professional if you need guidance concerning your quarterly taxes.
How To Calculate Estimated Quarterly Taxes
There are at least two ways for a person to calculate their estimated quarterly taxes. These are:
Estimating the amount you owe for the year: Making an estimate of the amount you owe for the whole year and sending 1/4 of that to the IRS is one way you can calculate quarterly taxes. For example, if you believe you owe $20,000 for the year, then you should send $5,000 each quarter. This approach is best for individuals who have a steady income year after year.
Estimating annual tax liability based on earnings: The second approach you can take is by estimating how much your annual tax liability is according to your annual income. With this method, you basically send a reasonable estimate of your yearly tax at the end of a quarter according to your income and tax deductible. Doing so makes it easier for people with varied incomes to calculate their quarterly taxes.
How To Pay Estimated Quarterly Taxes
After having calculated your taxes for each quarter, you might be wondering how you can settle these payments. You can pay estimated quarterly taxes by:
Submitting them online via the Electronic Federal Tax Payment System
Using the paper forms provided by the IRS to pay
Paying your tax balances that weren’t covered for your quarterly payments when you file your annual tax return
There are other options available as well — particularly when you show an overpayment of your tax once you have completed Form 1040 or 1040-SR. You can choose to apply part of or all of your overpayment, so it will go towards your estimated tax for the year instead of being refunded.
Make sure that you consider this amount when you estimate your tax payments for the current year.
3 Frequently Asked Questions & Answers
These are the most commonly asked questions concerning quarterly taxes.
1.What Happens If You Don’t Pay Estimated Quarterly Taxes?
You can expect the IRS to charge you with penalties if you weren’t able to pay the required taxes for the current year. Even if you have a refund due, you’ll still be penalized for inadequate or late tax payments as soon as you file your tax return.
The good news is that there are a few instances where you can be exempted from their penalty. These include:
Being a victim of a disaster, casualty, or other unique scenarios
Being at least 62 years of age while disabled or retired with the underpayment resulting in reasonable cause instead of willful neglect
2.When Can You Pay Estimated Taxes?
These are the deadlines on when you should pay your estimated taxes:
April 15 of the current year (Q1 estimated tax from January to March)
June 15 of the current year (Q2 estimated tax from April to May)
September 15 of the current year (Q3 estimate tax from June to August)
January 15 of the following year (Q4 estimated tax from September to December)
You’ll have to use the 1040-ES forms and send them to the IRS when settling these payments.
Make sure you keep these deadlines in mind, so you don’t forget to pay on time.
3.How Can You Make Estimated Taxes Easier?
As mentioned earlier, you should pay your quarterly taxes according to the given deadline, so you don’t have to deal with settling a lump sum payment. Doing so also helps you avoid suffering the consequences of being penalized, which can easily add up to the total payment you’ll need to make.
Another way you can make estimated taxes easier is by having your taxes withheld by your employed spouse. This is possible by providing their employer with a new Form W-4 that instructs how much tax to withhold in each paycheck. Those who are receiving annuity or pension should use Form W-4P instead.
Once you’ve completed making payments for your quarterly taxes, it’s best to maintain records that indicate the date and amount that has been paid. This information is crucial when you file your taxes and will help you avoid issues later on. In case you’ve forgotten to make a record of how much you’ve already paid, you can acquire this information by requesting the IRS for a transcript.
Need Help With Estimated Quarterly Taxes?
Paying your quarterly taxes on time is essential if you want to save yourself from potentially spending thousands of dollars on settling penalties. That’s why it’s vital for you to know if you should be making these quarterly payments while familiarizing yourself with when and how you should settle them.
At Core Group, we can help make your quarterly self-employment taxes easier to accomplish. Our tax experts are experienced CPA’s & EA’s in guiding freelancers, individual contractors, and small business owners to settle their quarterly taxes without the hiccups, problems or annoyances associated with self employment taxes.
Get in touch with us today to learn more.
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Lawton, OK 73501