One of the most important things that you need to do as a freelance business owner is to pay your quarterly taxes.
As a business owner or freelancer, paying your quarterly tax payments helps you avoid an underpayment penalty and interest when you file your taxes. But how do you do that? Here is the ultimate guide to paying estimated quarterly taxes that will help you stay out of trouble with the IRS when you file your income tax return.
- Everything You Need to Know About Estimated Quarterly Taxes
- 4 Tips to Make Paying Estimated Quarterly Taxes Easier
- Summary: Paying Estimated Quarterly Taxes
Everything You Need to Know About Estimated Quarterly Taxes
Quarterly taxes can seem confusing when you’re first getting started with paying them. If you know you need to start paying quarterly taxes, or if you’re wondering if you should be paying taxes, here’s all that you need to know.
What are Estimated Quarterly Taxes?
Estimated quarterly taxes are taxes that many self-employed people have to pay each quarter, or four times a year. This is based on how much money they estimate they’ll make that year.
The estimated quarterly taxes include income tax, self-employment tax, and other applicable taxes.
Unlike employees where their employer withholds income tax, self-employed people need to withhold and pay their own taxes. Thus, to make sure they receive the proper compensation from your income, the government requires quarterly installments.
What is the Self-Employment Tax?
When you work for a company, you will notice on your paycheck withholdings that they typically withhold federal income tax from your earnings, along with Social Security and Medicare taxes.
If you started your own business or you are working full time as a freelancer, there is no accounting department taking care of your Social Security, Medicare, and income tax withholding. Instead, you make those federal tax payments directly to the IRS.
So, where does the self-employment tax come into play? When you were an employee, your employer paid a portion of your Social Security and Medicare taxes. Now that you are on your own, you pay the full amount yourself.
So, how much self-employment tax do you have to pay? The Social Security rate is 12.4%. When you work for a company, the business pays 6.2%. The Medicare rate is 2.9%, with the employer paying 1.45%.
When you have your own business or a freelancer, the entire 15.3% instead of 7.65% as an employee.
These self-employment taxes are based on net earnings from the Schedule C IRS form.
Who Needs to Pay Estimated Quarterly Taxes?
Generally, if you do not have withholding taxes taken from a paycheck, then you are subject to making those quarterly tax payments. So, if you’re a business owner, you need to pay estimated quarterly taxes. You also must pay taxes if you’re a freelancer, sole proprietor, or independent contractor. However, you may have to pay taxes if you fall under any of the below categories. Here’s some more information:
- Self-Employed: If you’re an independent contractor, freelancer, or have multiple side gigs, you most likely need to pay quarterly estimated tax payments. This is because you aren’t withholding tax on any of your earned income.
- You’ll Owe More Than $1,000: If you believe you’ll owe at least $1,000 in federal income taxes when you file, and your withholding and refundable credits will cover less than 90% of your tax liability for this year or 100% of your liability last year (whichever is smaller), you will need to pay quarterly payments. If you believe this is the case for you, you may want to consult with a CPA.
- Investors and Landlords: If you make rental income or money from your investments (like dividends) you may need to make quarterly estimated tax payments. This depends on your full-time income, and if you’re withholding enough year to year. Again, you can always consult with a CPA if you believe you fall into this category.
Who Doesn’t Need to Pay Estimated Quarterly Taxes?
If you don’t fall into any of the above categories, you just might avoid having to pay estimated quarterly taxes. Here are a couple of categories of people who don’t have to pay quarterly:
- U.S. citizen who had no tax liability for the previous full tax year.
- A resident alien who had no tax liability for the previous full tax year.
Of course, if you question whether or not you should pay quarterly taxes, you can always consult with a CPA. Because if you cannot or you fail to make your estimated income tax payments, then you might face a penalty for underpayment.
When Are Quarterly Taxes Due This Year?
For the year 2021, quarterly taxes are due:
- April 15
- June 15
- September 15
- January 15 (2022)
It’s important to check on your dates every single year because weekends and holidays can affect when quarterly tax payments are due. However, these dates are the usual dates when quarterly taxes are due.
How to Calculate Estimated Quarterly Taxes
Now that you know what quarterly taxes are and if you need to pay them, and when, let’s talk about how you calculate your estimated taxes to pay each quarter. This can be a great way to understand what you need to pay, and why, especially if you aren’t using a tax accountant throughout the year.
Step 1: Estimate Your Taxable Income For The Year
We’re going to make this really easy for the purpose of these steps. Let’s say you estimate making $100,000 this year. In order to estimate how much income tax you’ll need to pay, you’ll need to take your estimated income and subtract your above the line deductions that you think you will have.
Above the line deductions include:
- Contribution to Traditional IRA (Form 1040 Line 32)
- Certain expenses of performing artists (Form 1040 Line 24)
- Certain expenses of state officials (162) (Form 1040 Line 24)
- Certain expenses for books and supplies incurred by teachers (162) (Form 1040 Line 23)
- Certain expenses for Army Reserve members (Form 1040 Line 24)
- Certain deductions of life tenants and income beneficiaries of property
- Retirement plan savings for the self-employed (219) (Form 1040 Line28)
- Penalties forfeited because of premature withdrawal of funds (Form 1040 Line 30)
- Alimony payments (215) (Form 1040 Line 31a)
- Reforestation expenses
- Required repayments of supplemental unemployment compensation
- Jury duty pay given to the employer (Form 1040 Line 36)
- Clean fuel vehicles (for tax years 2003-2006)
- Moving expenses for members of the armed forces (217) (Form 1040 Line 26)
- Archer Medical Savings Accounts
- Interest on student loans (221) (Form 1040 Line 33)
- Higher Education expenses (222) (Form 1040 Line 34)
- Health savings accounts (223) (Form 1040 Line 25)
- Costs involving discrimination suits
- One-half of self-employment tax
Once you’ve done that, you’ll have what’s called your “adjusted gross income”.
So let’s just say that you have above the line deductions that will equal $20,000. To determine your adjusted gross income, take the $100,000 in earnings and subtract the $20,000 in deductions. The result is $80,000, or your adjusted gross income.
Now that you’ve done this, you can then subtract the standard deduction for single taxpayers, which in 2020 is $12,400. That will leave your estimated taxable income at $67,600.
Step 2: Calculate Your Income Tax
Now you’ll need to multiply your adjusted gross income by your income tax rate, according to your tax bracket for 2021. Tax brackets can change year to year, so always use the most recent numbers.
So based on the current tax bracket, the $80,000 adjusted gross income would mean you would owe 12% in income taxes, or $9,600.
Step 3: Calculate Your Self-Employment Tax
If you make more than $400 in a year, you also have to pay self-employment tax. As mentioned earlier, the current self-employment tax is 15.3%, and it includes Social Security tax and Medicare.
To calculate your self-employment tax, you’ll need to multiply your estimated total income (or $100,000) by 92.35% (because you’re self-employed and don’t withhold taxes like an employer would). Once you have that number, you’ll multiply that by 15.3%.
So it will look something like this:
$100,000 x 92.35% (or .9235) = $92,350
$92,350 x 15.3% (or .153) = $14,129.55
That means that you will owe $14,129.55 for your estimated self-employment income taxes.
Step 4: Add it all together, and then divide the total by four
Now that you have your self-employment income taxes and income tax numbers, you need to add them both together and then divide them by four.
So it will look like this:
$9,600 + $14,129.55 = $23,729.55 (or your total estimated taxes)
$23.729.55/4 = $5,932.39 (or your estimated quarterly tax payment)
How to Pay Estimated Quarterly Taxes
If you have a CPA, they can typically help you estimate your quarterly taxes and help you pay them. But if you’re on your own, here are a few ways that you can pay your estimated quarterly taxes.
You can make your payments by check, and to do so, you’ll need to use IRS Form 1040-ES.
You can also pay your taxes online using IRS Direct Pay. If you pay using your bank account, it’s completely free to use. If you choose to pay on IRS Direct Pay using your credit card, there is a fee based on the payment system you use.
Just as a note, you’ll need to input quite a bit of information to get this started, including your name, Social Security or EIN number, and more. This is just to verify who you are.
What if I Don’t Pay Estimated Quarterly Taxes?
While it is totally possible to not pay your estimated quarterly taxes, I wouldn’t recommend you doing that. Not paying your quarterly taxes can come with penalties and interest that you’ll have to pay in the long run.
So instead, save your money and just pay your taxes on time.
Here are just a few things that can happen when you don’t pay your estimated quarterly taxes:
- Interest will accrue on any unpaid tax from the due date of the return until you make the payment in full. The interest rate is the federal short-term rate plus 3 percent, and interest compounds daily.
- If you owe taxes and then don’t file by the deadline, there’s also a penalty for not filing on time. The failure-to-file penalty is usually 5 percent of the tax owed for each month, or part of a month that your return is late, up to a maximum of 25%.
You can avoid these penalties, and more, by paying your quarterly taxes on time. And of course, if your income is more than you expected it to be, you may want to consult with a CPA to see if you need to pay more in taxes before filing.
However, there is a rule that can help keep you from paying penalties and interest even if you didn’t pay enough in taxes.
When you pay 100% of the taxes you owed in the previous year, that’s known as the safe harbor rule. Even if your income grew this year, you will avoid penalties if you match the payments that you owed in the previous year.
So if you paid all of your taxes that equaled up to $20,000 last year, but still made more this year, you won’t have penalties or interest for underpaying. However, you will need to make additional tax payments to make up the difference.
Just as a note, if your income is more than $150,000 per year, you’re actually required to pay 110% of what you paid in taxes last year.
4 Tips to Make Paying Estimated Quarterly Taxes Easier
There are a few simple things you can do to make it easier to pay estimated quarterly taxes each year.
1. Use A Tax Preparer
A tax preparer can give you a schedule with your estimated quarterly tax payments, as well as coupons and discounts if you choose to pay your tax payments via check. A few popular tax preparers include H&R Block and Jackson Hewitt, among others.
2. Sign Up For The Electronic Federal Tax Payment System (EFTPS)
Another way to make paying estimated quarterly taxes easier is to use the Electronic Federal Tax Payment System (EFTPS), an online payment system by the IRS (it differs from IRS Direct Pay). The service is completely free to use. You’ll get your own EFTPS number and PIN, and you’ll be able to schedule your estimated payments up to 365 days in advance if you choose.
3. Use A Tax Software
Along with using TurboTax, you can use them in addition to QuickBooks Self-Employed, which we can talk about now.
4. Pay Your Taxes Online With Another System
If you don’t want to use IRS Direct Pay or the EFTPS system, you can also pay your taxes online using QuickBooks Self-Employed.
One of the best features of the QuickBooks Self-Employed software is that you can do this because most bookkeeping systems don’t allow you to pay online. Along with all of their other features, you can calculate your expenses, deductions, and mileage to find out what you owe each quarter for taxes. You also get to file your taxes for free when subscribed to them.
Related Post: QuickBooks Self-Employed Review
This eliminates the need for a CPA if you’re just getting started or don’t have complicated taxes. Just as a quick note, you will need to get an EFTPS number before using this system, however, once you set it up you can do everything right in QuickBooks Self-Employed. You can sign up for your free EFTPS number here.
Summary: Paying Estimated Quarterly Taxes
It might sound overwhelming to pay your estimated quarterly taxes when you’re a freelancer or self-employed. But in reality, it’s not that hard, or that daunting. As long as you come prepared, and have a general idea of what you need to pay (even if you overpay), you’ll be in good standing with the IRS. Again, if you really need additional help, a CPA or tax accountant can be essential for you.
Overall, paying your estimated quarterly taxes is important, and can keep you out of trouble.
Note: This guide only contains information about federal taxes. If your state charges income tax, you may also need to pay quarterly state tax payments. It is written for educational purposes. It is not designed to take the place of an accountant, CPA, or tax professional.