The IRS requires you to make payments on quarterly estimated taxes when you’re making money from any source that isn’t subject to regular withholding.
Unlike regular employees, whose payroll tax contributions are automatically withheld from their paycheck, businesses, self-employed people, those with a side job, and S-corporation shareholders pay four installments throughout the year. The goal is to estimate your actual earnings and avoid penalties for underpayment at the end of the year.
Here are a few things you should know about quarterly estimated taxes.
Due Dates for Quarterly Estimated Taxes
If you own a business or receive income from a source other than wages, you’re probably required to make quarterly estimated tax payments. Thresholds are based on the previous year’s income tax return and your current year’s estimated income and expenses.
Quarterly estimated taxes are due on April 15th, June 15th, September 15th, and January 15th. Payments are due the next business day if any of these dates fall on a weekend or holiday.
Requirements for Paying Quarterly Taxes
Paying quarterly estimated taxes is a safe approach if you are self-employed or earning income from anything besides working as a regular employee.
When you work for someone else, your employer withholds income taxes from your paycheck. The stakes are even higher when you’re self-employed or running a business: no employer withholds your taxes for you; you’re responsible for paying them yourself.
The IRS requires that taxpayers make estimated tax payments if they expect to owe at least $1,000 in federal income tax for the year. For businesses filing as a corporation, that threshold is reduced to $500.
This rule applies to more than only business owners and people with side hustles. Earning large amounts from dividends or capital gains distributions through stocks or mutual funds and receiving large amounts of interest income also require quarterly estimated tax payments.
When filing your annual return, you’ll square up your actual tax bill with your estimated payments. Not paying enough taxes throughout the year via withholding taxes or quarterly estimates may cause you to be subject to underpayment penalties.
Of course, if you overpay, the IRS will send you a refund check.
What about the amount you need to pay? The amount varies depending on your income level and whether or not it’s subject to Social Security taxes.
How Do I Calculate Quarterly Tax Payments?
Taxpayers with income from self-employment, rental properties, or freelance work often have to make estimated tax payments.
Making punctual quarterly payments helps you avoid underpayment penalties.
Here are the steps to take to calculate your quarterly tax payments:
- Determine your company’s need to pay estimated taxes. Calculate your projected annual taxable income, and multiply it by your tax rate. The amount of your taxes depends on two factors; Your adjusted gross income (AGI) and your filing status. You must remit estimated quarterly payments if more than $1000 (or $500 for corporations.)
- If quarterly estimated tax payments are necessary, figure out your annual taxable income by adding all your income sources and subtracting any applicable deductions and exemptions.
- You can determine what you owe each quarter based on your projected quarterly income and tax rate, assuming no significant changes to your income or tax filing status.
How Do I Pay Quarterly Taxes?
Although there are multiple methods, the easiest way for individuals to pay quarterly estimated taxes is through the IRS website. You can pay directly from a bank account, debit, or credit card, or use Form 1040-ES and mail a check to the appropriate address.
It is also possible to pay estimated taxes through a tax professional or accountant who will charge you a fee for this service.
If you don’t pay enough during the year, you’ll owe interest on the tax due with your return. If you pay too much, you can get a refund for the excess amount when you file your return.
Businesses can also make payments through the Electronic Federal Tax Payment System (EFTPS).
How Can I Make Calculating and Paying Quarterly Estimated Taxes Easy?
Although most taxpayers don’t find the tax process enjoyable, there are a few things you can do to improve your experience with paying quarterly estimated taxes.
The most effective step for ensuring a smooth process is keeping good, clean books. These serve as your basis for all of your tax calculations, and as documentation should the IRS have any questions.
Talking to a professional can also ensure you’re paying the right amount of taxes every quarter and will help avoid underpayment penalties.
If you’re curious about straightening out your quarterly estimated taxes, Founder’s can help. Contact us to get started!