In the United States, the number of people who are self-employed is expected to triple by 2020. This will be approximately 42 million people, and each one of them will need to pay quarterly estimated tax.
If this sounds like you, read on to learn everything you need to know about quarterly taxes, so you can keep Uncle Sam happy.
Who Has to Pay Quarterly Estimated Tax?
If you’re an employee, your employer will hold your taxes for you. That means you don’t need to deduct it yourself.
But if you’re self-employed, or you’ll be filing as a partnership, sole proprietor, or S corporation, you’ll need to pay quarterly estimated tax. Keep in mind that this is only if you’ll owe more than $1000 in taxes for the year.
The IRS doesn’t want you to wait until April 15 before you pay your tax. For most people, it can be difficult to keep this money set aside. Instead, you need to estimate your annual income and spread your tax payments out in four payments throughout the year.
Understanding Quarterly Taxes
Quarterly taxes are self-employment taxes, which include Medicare and Social Security payments. They’re also your income taxes. If you don’t pay enough tax because you’ve underestimated your income, the IRS can impose penalties.
If you’ve recently begun working for yourself, the idea of paying your own taxes can seem overwhelming. But by keeping careful records of your business expenses and earnings, you can meet all your tax obligations.
The best idea is to open a bank account solely for your taxes. Each time you’re paid, transfer 30% into this account. It’s likely that you’ll be tempted to use this money if you have an emergency situation. Avoid this at all costs. If you can’t pay your taxes when they’re due, you’ll have massive interest charges and penalties.
Calculating Your Taxes
When you’re working out how much tax to pay, you’ll usually base it on your previous year’s earnings. Look at the previous year’s tax return and use this estimate your quarterly payments.
For example, if you paid $20,000 in taxes last year, you’ll need to pay $5,000 in taxes each quarter. However, if you know your income has increased this year, you’ll also need to increase the amount of tax you’re paying, so you don’t risk a penalty.
For many freelancers and business owners, their income will vary throughout the year. And more and more people are choosing to work for themselves for the first time. If this sounds like you, you may want to use the annualized income installment method.
This means that you’ll calculate your tax at the end of March, May, August, and December. You’ll base your tax payments on the actual tax you’re liable for each quarter. Be sure to include Form 2210 if you’re using this method so you can show the IRS your calculations.
This can be a more complicated method of calculating how much tax you owe. If you’re not particularly math-savvy, you may want to use an online quarterly tax calculator. It may also be a good idea to invest in tax software or a business accounting tool.
Working Out Your Deductions
People who are self-employed or run their own business can make a number of tax deductions. These include:
- Advertising for your business
- Business insurance
- Car expenses (if traveling for your work)
- Depreciation (on business assets like furniture, cars, and office equipment)
- Home office expenses (including utilities and a portion of rent)
- Business supplies
- Business travel
- Banking or Paypal fees
- Industry magazines
You can only deduct expenses for things that are considered “necessary and ordinary” for you to deduct business.
Just as you’re keeping track of your tax through the year, you’ll need to stay on top of these deductions. That means keeping records and receipts for anything you’re planning to deduct.
While deductions are a perk of self-employment, keep in mind that they do reduce your taxable income. This can make it more difficult if you’re planning to purchase a house in the next couple of years.
Deductions are not calculated quarterly, but you should still keep track of them each quarter. You’ll submit them on your Schedule C form in April with your annual return.
Paying Your Taxes
The 2018 due dates for quarterly taxes are:
- April 15
- June 15
- September 15
- January 15 (2019)
Mark these dates on your calendar, and ensure you’ve got your tax sorted in the weeks leading up them.
You can pay via mail through a check with Form 1040-ES, which includes a payment voucher. If you’d like to pay electronically, you can pay directly through your bank account. If you want to pay by credit card, expect to pay a fee of at least 2%.
It can be tempting to procrastinate with quarterly taxes and decide to deal with it in April. Unfortunately, you’ll face stiff penalties for that. The IRS will charge you 4% of the amount you’ve underpaid for each quarterly due date for the number of days it was unpaid.
It can also charge you a fee for inadequate or late payments, even if you’re actually due for a refund.
These penalties make it much smarter to get organized and keep your tax sorted throughout the year. If you’re not sure how to do your taxes, it may be worth consulting a professional who can do it for you.
If you’re self-employed, the idea of paying quarterly taxes can be a little scary. But by using the above guide, you’ll be able to stay on top of your tax obligations.
There are many perks to running your own business, including choosing your own clients and working your own hours. Doing your taxes may not sound fun, but it puts the control back in your hands- and allows you to deduct a number of business expenses.
Still not sure where to get started with your taxes? Check out some of our blog posts about business taxes, or get in touch with your questions.