Estimated Quarterly Taxes: How to Calculate and File


Posted 4 months ago in Taxes
by Rachel Cottam

Disclaimer: This post only applies to estimated quarterly taxes for Federal income tax filing. Depending on where you live, you may have to file quarterly state taxes as well.

 

When you’re an employee, it’s normal to have money withheld from your paycheck for taxes, retirement funds and insurance. When you’re self-employed, or if you work as a contractor, there are no deductions taken. You receive the pre-tax amount of your pay, also called your gross income.

There are lots of situations in which you may receive income that hasn’t yet been taxed. This can include things like rent payments, interest, dividends, etc. While having no deductions may seem like a fantastic dream come true, trust us, it’s not. Even though there is no employer withholding taxes from these payments, you still owe that money. And guess who’s responsible for calculating and paying them? You. It can be a pain! But that’s why ZipBooks is here to walk you through it all. 

What are estimated quarterly taxes?

No matter how you get paid, you have to pay taxes on your income. And if your employer doesn’t withhold your taxes and submit them to the IRS for you, then you will have to do it yourself. On top of that, if you’re self employed and expect to owe at least $1000 in taxes, you can’t wait until April 15th to pay it.

This means you have to file and submit taxes every 3 months. These taxes are called “estimated” taxes because you don’t know for sure what you’ll owe until you actually complete your tax return next spring. But the IRS expects you to take an educated guess as to what you will earn and what you will owe, and then submit part of that tax each quarter.

Additionally, there are penalties if you don’t submit enough tax. And these penalties can seriously add up if you really underestimate. So it’s pretty important that you make the best guess that you can.

How do I know if I have to file estimated quarterly taxes?

If you’re self employed and expect to owe at least $1000 in taxes, then you must file quarterly.

Not sure if you count as “self-employed?” According to the IRS, you count as self-employed if you:

  • Carry on a trade or business as a freelancer or independent contractor
  • Are a member of a partnership that owns a business
  • Own your own business (including a part-time business)

This minimum extends to S-corporation shareholders, partnerships, and sole proprietorships. It doesn’t matter if you have a full-time job and your self-employment income is generated from a part-time side gig. If you will owe more than $1000, make sure you make those quarterly payments.

LLCs and C-corporations must submit quarterly taxes if they expect to owe more than $500 in tax for the year.

What taxes am I responsible to pay?

If you are a sole proprietor (including an independent contractor) or a partner in a partnership (including a member of an LLC), then listen up! In addition to paying income tax, the IRS requires that you pay self-employment tax (SE Tax). The self-employment tax rate is 15.3% of your net income and covers social security and medicare taxes. Essentially, the SE tax covers the payments your employer would have withheld from your paycheck.

If you make less than $400 from your self-employment, you don’t need to worry about self-employment tax. Making more than $400 from your business? Calculate how much self-employment tax you owe using the Schedule SE form from the IRS.

How on earth am I supposed to estimate?

There are actually 2 ways to calculate your estimates: base it on last year or use an income tax calculator.

Base It on Last Year

You can take what you reported in the previous year and use that as your starting point.

The IRS generally does not impose penalties for underpayment as long as you have paid at least 100% of your obligation for the previous year. This is known as the “safe harbor rule”.

So even if your income jumps considerably this year, the IRS shouldn’t penalize you as long as you pay quarterly taxes of at least 100% of the amount that you paid last year.

Note: The IRS states that people making over $150,000 a year need to pay 110% of the previous year’s obligation before they will waive the underpayment penalty.

Use an Income Tax Calculator

The other way, which is great if you really don’t have a good starting point from last year or just opened for business, is to use a tax calculator to estimate what you expect to earn this year. Plug it into an income tax calculation program, along with your expected deductions and credits, and you will get a number that you can use. If it helps, you can use the numbers from a similar business in industry to make projected estimates. 

You can calculate your self-employment tax by multiplying your total taxable income by 92.5%, which is considered the self-employment taxable income. You then multiply this number by 15.3%, the self-employment tax rate, to get your self-employment tax obligation.

Add your income tax and your self-employment tax obligations together. Split that total into 4. And then submit 25% of the total tax each quarter.

When do I have to file quarterly taxes?

Quarterly taxes are just that–quarterly. This means that instead of paying all your taxes by April 15, there are actually 4 due dates throughout the year. Here’s the IRS payment schedule you’ll need to keep handy:

  • 1st Quarter (Jan 1–March 31) – April 15
  • 2nd Quarter (April 1–May 31) – June 15
  • 3rd Quarter (June 1–Aug 31) – Sept 15
  • 4th Quarter (Sept 1-Dec 31) – Jan 15 of the following year

The due date is usually the 15th of the month, but it may be delayed if the 15th falls on a weekend. So, not only do you have to file quarterly, but each quarter’s submission must be made by the deadline or you may be charged a penalty.

Don’t make the mistake of thinking you can send in all of your estimated taxes on January 15–you might get hit with interest and penalties. This means that if you miss a payment by a couple of days, don’t just wait until the next quarter to pay that portion–pay it as soon as possible to avoid racking up additional interest.

How and where do I file?

The IRS makes it fairly easy to file. Use Form 1040-ES (Estimated Tax for Individuals) to figure out how much tax you owe. You can fill out the form and mail it in with a check, or you can file and submit your payment online through the Electronic Federal Tax Payment System (this is the preferred method).  Once you’ve registered for your account (fair warning: processing can take a few weeks, so plan ahead), you’ll make quarterly payments online.

The mailing addresses are as follows:

If you live in Florida, Louisiana, Mississippi, or Texas:

Internal Revenue Service P.O. Box 1300 Charlotte, NC 28201-1300

Alaska, Arizona, California, Colorado, Hawaii, Idaho, Nevada, New Mexico, Oregon, Utah, Washington, or Wyoming:

Internal Revenue Service P.O. Box 510000 San Francisco, CA 94151-5100

Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Montana, Nebraska, North Dakota, Ohio, Oklahoma, South Dakota, or Wisconsin:

Internal Revenue Service P.O. Box 802502 Cincinnati, OH 45280-2502

Alabama, Georgia, Kentucky, New Jersey, North Carolina, South Carolina, Tennessee, or Virginia:

Internal Revenue Service P.O. Box 931100 Louisville, KY 40293-1100

Connecticut, Delaware, District of Columbia, Maine, Maryland, Massachusetts, Missouri, New Hampshire, New York, Pennsylvania, Rhode Island,

Vermont, or West Virginia:

Internal Revenue Service P.O. Box 37007 Hartford, CT 06176-7007

What if my estimated income changes in the middle of the year?

What happens if all of a sudden you get a new client, and are going to make a lot more than you thought you would?

First off, congratulations! However, you can expect that you’ll end up owing a lot more at tax time than you had initially planned.

You may have to adjust your remaining quarterly payments upward significantly so that you aren’t caught owing so much when April 15th comes around. If you over- or underestimate earnings, you can submit another Form 1040-ES to refigure your estimated taxes. Then, attach a Form 2210 with your annual return to explain the payment discrepancies.  

Although as long as you hit that 100% of the previous year’s liability figure, a big jump in income should not result in a big penalty for underpayment of taxes.

Are there any deductions for being self-employed?

Yes! Filing self-employment taxes isn’t all headache. In fact, aside from being your own boss, some of the best perks of self-employment are the tax deductions. You can use these deductions to help calculate the amount due for your quarterly taxes, but you’ll only file a Schedule C form with your annual return. 

Everyone is entitled to deductions, so don’t shy away from claiming them for fear of an audit. Of course, you can’t write-off everything—but any deductions you take reduce your taxable income, putting more money in your pocket.

If you want to claim credits or deductions, you have to have proof. Hang on to relevant documentation, scan receipts, and stay organized. Keeping an eye on your books and producing regular expense reports will simplify this process for you.

Here are a few great write-offs for self-employed individuals and 1099 contractors:

  • Home Office: Any space that is used exclusively and principally for business can be deducted using IRS Form 8829. Choose the standard option of $5 per square foot or calculate expenses in proportion to your home (including utilities, mortgage, etc).
  • Mileage: Deduct mileage cost from vehicles used solely for business. Again, you can calculate actual costs or take the standard $0.545 per mile.
  • State licensure fees: The amount you pay each year to your state or local governments for business licenses is fully deductible. (Sometimes initial licensing fees are not).
  • Supplies and materials: Any business materials or supplies can be written off.
  • Professional fees: Costs of hiring a lawyer, an accountant, or even a tax professional are deductible (including any startup fees).
  • Pass-through businesses: The recent Tax Cuts and Jobs Act allows pass-through organizations (most small businesses) to deduct up to 20% of your business income.

If you’ve got the documentation to prove it, take every deduction you can. Be organized, proactive and strategic, and you’ll come to love tax time, not dread it.

 

So that’s it! When you prepare and send your quarterly taxes on time, and as accurately as possible, your tax-filing experience will be much more pleasant come April.

Note: There are some special cases and exceptions to the filing rules. Find more details here.


About Rachel

Rachel Cottam is a content writer at ZipBooks and a former high school English teacher. Her writing and editing have been featured in academic journals and tech websites alike.

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