If you’re self-employed or are a freelancer, you get to set your own work schedule and determine your own earning potential. It’s easy to see why going this route is appealing to many people. According to Pew Research, about 16 million Americans are self-employed.
However, there is one downside to self-employment: taxes. If you work for yourself, you may be wondering, “Do I have to pay quarterly taxes?” Below, find out how estimated taxes work and how to calculate what you owe.
Who should pay quarterly taxes?
One of the biggest tax mistakes you can make is not paying estimated taxes. The IRS requires you to pay taxes as you earn income throughout the year, either through withholding money from your paycheck or by paying quarterly taxes. Estimated taxes typically apply to self-employed workers, freelancers, and people who have a side gig.
The reason estimated taxes are so important for freelancers and self-employed individuals is that you don’t have a regular paycheck, nor do you fill out a Form W-4 with an employer. Instead, you’re solely responsible for tax withholding yourself and paying taxes throughout the year.
If you’re not self-employed, but instead have extra income beyond your salary, you may also have to make estimated payments. Landlords and some investors may be required to do so.
How to calculate quarterly taxes
Calculating your quarterly tax payments may seem overwhelming, but it’s actually a relatively simple process. If you track your invoices, income, and expenses with an accounting program like QuickBooks or Freshbooks, these examples of the best tax software will even calculate your quarterly tax payments for you.
If it seems too complex, consider hiring a tax professional, like a certified public accountant. They can prepare your taxes and determine what you owe each quarter.
If you prefer to do it on your own, here’s how to calculate your estimated payments in five simple steps.
1. Gather last year’s tax return
You can use your tax filing from the previous year as a guide. Look for the line on Form 1040-ES — the Estimated Tax for Individuals form — on the previous year’s tax return that lists the total tax that you paid for the year. If you take that number and divide it by four, that can give you an idea of how much you’ll have to pay in taxes each quarter.
2. Fill out Form 1040-ES
Next, fill out IRS Form 1040-ES for the current tax year. Complete it line by line, as the form will walk you through the necessary steps. You’ll need to take into account:
- Income: The worksheet will ask you to enter your expected income and profits for the year. It’s okay to make an educated guess on what it will be. For each quarter, you should recalculate it to avoid underpaying.
- Deductions: Most people will opt for the standard deduction. If you’re single or married filing separately, the deduction in 2023 is $14,600. If you’re married and filing a joint return, it’s $29,200.
- Credits: If you qualify for certain tax credits, such as the Adoption Credit or American Opportunity Tax Credit, you can reduce your tax bill.
- Self-employment tax: The self-employment tax covers Social Security and Medicare taxes. The self-employment tax rate is 15.3% (of up to $168,600) in 2023.
3. Double-check your math
If you want to double-check your calculations, you can use a calculator like the Estimated Payments Calculator offered by the Center on Budget and Policy Priorities. While calculators like this one can help determine your estimated payments, you should always review the calculations yourself or hire a CPA or tax professional to ensure its accuracy.
4. Submit your payments
Once you know how much you have to pay each quarter, you can submit your payments. You can pay online, over the phone, or by check or money order.
When to pay quarterly taxes
The IRS splits up the year into four quarterly periods, each with its own payment deadline. If you don’t pay your taxes by the quarterly tax deadline, you may be subject to penalties. That’s the case even if the IRS owes you a refund after you file your income tax return in April.
|Tax Due Date
|January 24 — March 31
|April 1 — May 31
|June 1 — August 31
|September 1 — December 31
|January 16 of the following year
How to pay quarterly taxes
There are several different ways to pay your quarterly taxes:
- Online via IRS Direct Pay: You can make payments online with IRS Direct Pay. With this option, you can pay directly from your bank account, or you can use a credit card to pay your taxes.
- Online via EFTPS: The Electronic Federal Tax Payment System is another way to pay your taxes online. It requires you to create an account ahead of time, and it can take up to seven business days before you can make payments.
- Phone: You can pay with a credit or debit card by calling one of three service providers:
- WorldPay US, Inc: 1-844-729-8298
- Official Payments: 1-888-872-9829
- Link2Gov Corporation: 1-888-729-1040
- Cash: If you want to pay with cash, you can pay up to $1,000 per day at a retail partner. Before you can do so, you must register for an account at www.officialpayments.com/fed. Visit the IRS website to find a participating retail partner.
- Check or money order: The IRS strongly encourages taxpayers to use another payment method to pay your quarterly taxes. However, if you have to pay with a check or money order, you can do so by mailing it with a completed payment voucher to the required IRS address. The address is dependent on where you live, so make sure you double-check the Form 1040-ES. When you send in your check, make the check out to the United States Treasury and enter the year and “Form 1040-ES” on the check or money order.
What happens if you don’t pay quarterly taxes?
Forget getting a tax refund. If you don’t pay your quarterly taxes, or if you underpay, you’ll receive a CP30 Notice from the IRS. If you don’t pay enough taxes throughout the year, you may face underpayment penalties. The penalty will apply if you don’t make estimated payments by their due date and if the amount you’ve withheld from your income is less than 90% of your tax bill.
You’ll also have to pay your tax bill for the year upfront, on top of the penalties and fees. If you’re caught off guard, you may not have set aside enough money throughout the year. You could end up scrambling to find enough money to satisfy your tax obligations, leading you to wipe out your savings or even end up in debt.
FAQs on quarterly taxes
How do you pay quarterly income tax payments to the IRS?
If you receive income from an employer, your federal income tax is withheld from your paycheck. But if you receive income from a small business or side hustle and you expect to owe more than $1,000 in federal taxes by the end of the year, you’ll need to pay quarterly estimated taxes. You don’t have to pay estimated taxes for the current year if you had no tax liability for the prior year. Use Form 1040-ES to estimate and pay your quarterly taxes. Typically, you’ll need to mail your checks by these dates:
- April 18
- June 15
- September 15
- January 16
What happens if you miss a quarterly estimated tax payment?
If you miss your quarterly estimated tax payment, you should send the check as soon as you are able. That’s because interest will accrue on the underpayment over time. You’ll also be charged a penalty for the late payment. However, in some situations, you may be able to get penalty relief. For example, if you were seriously ill or unable to obtain required documents, the IRS may waive the penalty.
How do you calculate quarterly estimated tax payments?
First, you’ll need to estimate your adjusted gross income for the year. When calculating your tax payments for the current year, use your income from the prior year as a starting point.
From there, you can use Form 1040-ES to estimate your quarterly payments based on your taxable income, deductions, and credits. Remember that if your self-employment income exceeds $400, you’ll be charged self-employment tax and income tax.
Who typically pays quarterly taxes?
Small business owners, independent contractors, and freelancers all have to pay quarterly taxes if they expect to owe more than $1,000 in a year. Corporations have to make estimated payments if they expect to owe more than $500 in a year.
You do not have to pay quarterly taxes if you’re a W-2 employee and your taxes are withheld unless you also have a side business with enough earnings.
The bottom line on quarterly taxes
If you’ve been asking yourself if you need to pay quarterly taxes, you should know that you likely have to pay estimated taxes each quarter if you’re a freelancer, entrepreneur, or have a side gig. If you forget, or if you don’t set aside enough money in a savings account to cover the required payments, the IRS could penalize you with a huge tax bill and penalties when it’s time to file your return for the year.
To avoid tax issues and get better with how to manage your money, use an accounting program to track your income and expenses. As your business grows, you may want to hire a tax preparer to help you navigate the sometimes confusing and complicated tax system.