So you decided to quit your full time job to start your own business. Congratulations! That’s a big step. However, now you’re likely to have a new concern: how to pay taxes. After all, in the past someone probably automatically withheld your income tax for you.
Don’t worry–it’s a fairly straightforward process. Now that you work for yourself, you’ll pay estimated quarterly taxes. This may sound like quite the hassle. But in reality, paying four times a year will save you the headache of having to write a giant check to the IRS next tax season (and will help you avoid a potential penalty).
In this post, we’ll focus on who needs to pay quarterly taxes, what they need pay, and how to pay now that you’re self-employed.
If you’re self-employed, the IRS requires that you file an annual tax return and pay estimated taxes each quarter. Not sure if you count as “self-employed?” According to the IRS, you count as self-employed if you:
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). This SE Tax is essentially the equivalent of paying Social Security and Medicare, but for people who are self-employed.
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.
“Estimated taxes” means you’ll use Form 1040-ES (Estimated Tax for Individuals) to figure out how much tax you owe. Form 1040-ES includes blank vouchers you can mail in to pay your quarterly taxes. You can also pay online using the Electronic Federal Tax Payment System.
If this is your first year being self-employed, you’ll need to estimate how much you expect to earn this year. Don’t worry about being 100% accurate. Even if you estimated too high or too low, you’ll simply complete another Form 1040-ES next quarter to reconfigure how much you owe.
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:
It’s important to stick to the schedule and not to miss any payments. 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.
Now that you’re an expert on paying quarterly taxes, it’s time to learn more about how to succeed at self-employment. First up, 7 deadly freelancer sins to avoid.