If you are self-employed, congratulations, you now have to make tax payments every quarter of the year or Uncle Sam will pay you a visit to drop off interest and penalties.
We, ourselves, have to pay quarterly tax payments and here at LYFE Accounting, we help business owners pay theirs.
But don’t worry.
In this post, we’ll break down quarterly estimated payments in an easy to understand way so you pay on time and pay the right amount.
Today, we’re going over the following:
- What are quarterly tax payments
- Who has to pay quarterly tax payments
- When to pay quarterly tax payments
- How to calculate your quarterly tax payments
- How to pay quarterly tax payments
- What happens if you don’t pay your quarterly tax payments
Note that this is only educational information.
For guidance or advice specific to your situation, you should consult with your tax or legal counsel.
Ready to dive in? Let’s get started!
What Are Estimated Quarterly Tax Payments?
Quarterly taxes also known as quarterly estimated payments are taxes paid every quarter to the IRS by those who are self-employed or those who do not have withholding tax taken.
This differs from a typical employee as most employers withhold employee income taxes for them.
Who Has to Pay Quarterly Taxes?
In general, if you did not get taxes withheld from your earnings and expect to owe at least $1,000 in taxes, you have to pay quarterly taxes.
This is typical of the self-employed as there is no employer to take out taxes for them.
You are considered self-employed if you:
- run a business by yourself, part-time or full-time,
- are an independent contractor, or
- are a member of a partnership that does business
But quarterly tax payments can also apply to anyone who receives additional untaxed income such as:
- business distributions
- significant investment income
- large capital gains
However, you don’t have to pay estimated taxes for the current year if you meet all three of the following conditions.
- You had no tax liability for the prior year.
- You were a U.S. citizen or resident for the whole year.
- Your prior tax year covered a 12-month period.
So be sure to check your previous year’s tax return to see if you are required to pay.
When To Pay Quarterly Tax Payments?
Quarterly estimated tax payments are to be paid four times a year.
- The first-quarter deadline is April 15.
- The second-quarter deadline is June 15.
- The third-quarter deadline is September 15.
- The fourth-quarter deadline is January 15.
Note that you can make payments early if you would like to. If it’s easier for you to pay before each deadline or break the payments up into 12 payments instead of 4, feel free to.
Just make sure your payments are made before each deadline to avoid penalties and interest, something we will discuss later in the post.
How Much Do You Have to Pay in Quarterly Taxes?
There are a few ways you can find out how much you have to pay
The first and easiest way is to divide your tax liability from the previous year by four.
The benefit of using a tax company like LYFE Accounting to file your taxes is that not only do you generally pay a lot less in taxes, but your estimated taxes are calculated automatically for you.
Alternatively, you could estimate your tax liability based on what you have earned thus far in the year and compute your estimated taxes on a quarterly basis.
If you need help with this you can follow a Worksheet provided by the IRS to walk you through it.
How to Pay Your Estimated Quarterly Taxes Every Quarter?
You can bet that the IRS makes it super easy to pay your quarterly taxes. Here are your choices.
1. You can pay online at irs.gov/payments. This is the easiest way to pay.
2. You can also send estimated payments by mail with Form 1040-ES.
Alright next up is the moment we’ve all been waiting for…
What Happens If You Fail To Pay Your Estimated Quarterly Taxes?
First and foremost, you will have a large tax liability that you will be responsible for paying.
In addition, you will have to pay interest and penalties on the underpayment of estimated taxes.
If you don’t pay your tax liability in full by the deadline, the IRS has the ability to assess a penalty of one-half percent per month on the balance unpaid.
Note that there are situations where the penalty can be waived. Here are the situations:
- You owed less than $1,000, or
- Your withholding and estimated taxes paid were at least 90% of the current year tax liability, or 100% of the prior year liability, whichever is smaller. or
- The failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
- You retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.
Estimated Quarterly Tax Payments: Summary
Well, there you have it, everything you need to know about quarterly estimated tax payments!
As a recap, here are the key takeaways you need to know:
- Quarterly taxes also known as estimated payments are taxes paid every quarter to the IRS by those who are self-employed or those who do not have withholding tax taken.
- Quarterly tax payments can also apply to anyone who receives additional untaxed income.
- You can pay your estimated taxes online or by mail with Form 1040-ES.
- There are a few ways you can find out how much you have to pay.
- The easiest way to calculate your estimated taxes is to divide your tax liability from the previous year by four – something a tax professional would do for you.
- And lastly, if you do not pay by the deadline, you can be charged with penalties and interest on the unpaid balance.
As we’ve mentioned earlier, here at LYFE Accounting, we help business owners and individuals with their taxes. Let us help you too! Simply contact us today.