How to Know if You Need to Pay Quarterly Taxes
I’m not an accountant, I just get to hang out with them. And this is most certainly, not tax advice.
You likely look forward to many special days during the year, such as your birthday, anniversary, and even National Taco Day. However, there are also some days you want to forget about completely – like Tax Day.
While this is true, you don’t actually pay your taxes on Tax Day; this is just the deadline for meeting your tax liability (the amount of money you owe in taxes). This is because your employer usually takes taxes out of your paycheck, which ensures you are square with the IRS.
What happens if you are a contract worker, freelancer, or self-employed and don’t have an employer to withhold your taxes? Just like everyone else, you still must pay your taxes. It’s your responsibility to know what they are when to pay them, and how much to pay.
Because of this, you may need to pay quarterly taxes. Are you wondering, “do I need to pay quarterly taxes?” Keep reading to find out.
Quarterly Taxes Defined
The terms “quarterly taxes” and “estimated taxes” mean the same thing, and many people use them interchangeably. If you are self-employed, quarterly taxes are how you pay the IRS throughout the year if your income reaches and exceeds a specific amount.
Depending on what you make, you may have four “tax days” (!) throughout the year.
The payments are made every three months and cover your income tax, Medicare, and Social Security. Two types of taxes you must pay as a self-employed individual include:
Income Tax
Part of your self-employed quarterly taxes goes for income tax – at your income tax rate – just like everyone else in the U.S.
Self-Employment Tax
For self-employed and freelancer quarterly taxes, you will also have to pay self-employment tax, which is usually 15.3% of your income. It includes Social Security and Medicare taxes. If you are a salaried worker, your employer splits this cost with you. However, when you own a business or work for yourself, you must pay the whole amount.
Because of how much you must pay for freelancer, self-employed, and small business quarterly taxes, it’s recommended by most financial experts that you set aside around 25 to 30% of every paycheck you receive for taxes. You won’t have a massive tax bill to pay that you can’t cover on your Tax Days when you do this.
Who Is Responsible for Paying Quarterly Taxes?
Small business owners, independent contractors, and freelance workers are responsible for paying quarterly taxes. According to the IRS, you must pay estimated quarterly tax if you pass the following 2-part test:
You are expected to owe at least $1,000 in taxes from your income.
The amount of taxes you’ve withheld (tax withholding usually happens through payroll) and refundable credits will be less than the smaller of:
90% of your prior-year tax liability, or
100% of your tax liability two years prior.
Point two sounds confusing, which is why we can’s stress enough that working with a tax professional, like a Certified Public Accountant or Enrolled Agent, is highly recommended. If you owe quarterly taxes and fail to pay four times per year, you may have penalties assessed to your balance, along with the taxes you owe. Because of this, it’s something you don’t want to overlook.
Figuring Out the Amount of Quarterly Taxes You Should Pay
As mentioned above, you can have a tax professional determine this for you and you should. However, You may want to know how to determine this amount on your own and bust it out as a cool party trick.
Begin with Your Income Tax
The basic process to determine your tax liability starts with your AGI – adjusted gross income. If you think your income will be similar to last year’s, you can use the AGI seen on your prior year’s tax return.
From this, subtract the amount from your itemized deductions or the standard deductions. The number you get is your taxable income. Once you have this number, you can use the federal income tax brackets to determine what you owe.
Add-In Self-Employment Tax
After you know your estimated taxes, it’s also necessary to determine your self-employment taxes. This is necessary if your earnings from self-employment were $400 or higher for the year.
To determine your self-employment tax, take your total income and multiply it by 92.35%. That’s because only 92.35% of your income is taxed. This is your new taxable income for self-employment taxes.
Next, it’s time to apply the specific tax, which is 15.3% and breaks down to:
· 2.9% to Medicare tax
· 12.4% to Social Security tax
Add the self-employment tax amount to your income tax amount, and you know your total tax liability. After that, divide the number by four, and you have your estimated quarterly tax payments.
When Are Quarterly Taxes Due?
Quarterly tax payments must be paid according to the following schedule:
April 15th for income received January 1st to March 31st
June 15th for income received April 1st to May 31st
September 15th for income received June 1st to August 31st
January 15th of the following year for income received September 1st to December 31st
Options for Paying Your Quarterly Taxes
Now that you know what they are, who needs to pay them, and how much you must pay, it’s time to learn where to pay. You have a few options:
Pay by Check or Cash
If you want to go old-school, you can pay in person at an IRS office or mail a money order or check to the office.
Use the App
You can pay your quarterly taxes using the IRS2Go app right from your tablet or phone.
Pay Over the Phone
You have the option to use the free EFTPS (Electronic Federal Tax Payment Service). With this, you can use a voice response system to pay your quarterly taxes over the phone.
Pay Online
Visit the IRS payment page and set up online payments to cover your tax liability. You can add your bank account or debit card to the online portal, allowing fast payment.
The Bottom Line
There are a few more things you must remember. For example, the taxes you have calculated with the equation above are just an estimate. You must still file a tax return each year, just like everyone else, that shows what you made in the year.
Also, if you are making more than usual, or if your income will be more or less than what you estimated, you can adjust the quarterly taxes you pay based on this. If you do not do this, then you may wind up having to pay more on Tax Day, which can be an unpleasant surprise.