Business owners, freelancers, and even Uber drivers must pay taxes quarterly. Why? Because they are contractors, not employees. Most companies do not include contractors on their payroll. Instead, they pay contractors after the service is rendered or after an invoice is issued.
When you work for a company, the taxes you owe are usually withheld from your paycheck. Contractors must withhold their own taxes.
Contractors are also responsible for additional self-employment tax. This is a Medicare and Social Security contribution that your employer usually pays on your behalf. When you work as a contractor, you are not only responsible for withholding your own taxes, but you must also pay the taxes that your employer would normally pay.
Quarterly tax payments can help self-employed workers break down their tax liability into more manageable payments. You will need to make quarterly settlement payments to the IRS for all non-W-2 work you do. If you don’t, you may not only be stuck with a big tax bill at the end of the year, but you may be required to pay interest on what you owe. This guide will tell you everything you need to know about quarterly tax payments.
Who has to pay quarterly taxes?
Everyone who works for himself will have to pay taxes quarterly. This includes people who are freelancers, use a gig economy app like Uber, or earn income from other activities like selling crafts on Etsy.
The IRS is a “pay as you go” system. This means you owe money as you earn it, not just at the end of the year. Staff members are taxed every time they are paid. They just don’t see the taxes that are withheld from their paycheck because their employer withholds taxes for them. If you’re transitioning from a W-2 program to self-employment, the realization that you have to pay taxes when you earn money can come as a big surprise.
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In addition to working for yourself, there are several other sources of income that may also require you to make quarterly tax payments:
- Rental income – If you receive rental income from your home, it is taxable. This could be income you receive from a tenant, as well as short-term rentals such as Airbnb. Keep a portion of the income you earn and save it for quarterly payments.
- Income from investments – Whenever you sell an asset, it creates a taxable event. Depending on how often you trade and whether you own assets for more than a year, you may be liable to pay capital gains tax. This, combined with any interest or dividend income, may be taxable once the money is in your bank account.
- Retirement income – Your retirement may be taxable once you start withdrawing funds. Your 401(k), for example, is a tax-deferred retirement account. This means that you do not pay taxes on the money you invest now, but when you retire it will be taxed as if it were income. You can choose to withhold taxes or pay your own taxes quarterly.
- Getting a large unexpected income, such as winning the lottery – When you unexpectedly receive a large amount of money – like winning the lottery – it is taxed as if it were income. Depending on the source of your windfall and where you live, you may choose to pay small payments over time and quarterly taxes rather than a lump sum payment all at once.
- Alimony – If you’re getting a divorce and receiving alimony from your spouse, you don’t need to count the money as income. If, however, you are the one who owes support to your spouse, you are responsible for paying taxes on the money they receive. Child support taxes are not automatically withheld, so it would be a good idea to set aside some money for quarterly tax payments.
- Distribution of income from business partnership − Enterprises do not withhold taxes for distribution payments. This is the income that you receive not as an employee, but as a partner or business owner. Typically, distribution revenue is reported on the K-1 form. Business partners are responsible for their own tax liability, so it is recommended that you schedule quarterly payments.
When are quarterly taxes due?
Quarterly estimated tax payments are paid four times a year. The repayment periods are as follows:
- April 15 – For income received between January 1 and March 31
- June 15 – For income received between April 1 and May 31
- September 15th – For income received between June 1 and August 31
- January 17 – For income received between September 1 and December 31
The IRS recommends that anyone who thinks they will owe $1,000 or more when they file their taxes make quarterly payments. This includes income earned from regular W-2 work—and subject to withholding—as well as any income you earn from self-employment or working from home.
It can be difficult to plan ahead for taxes, which means there’s a chance you’ll either overpay or underpay. If you pay too much, you will get your money back as a refund. If you underpay (meaning you didn’t pay enough taxes), you will be subject to fines. You can use the free IRS withholding calculator to determine how much you owe.
Read more: How much should you allocate in your tax budget for self-employed as a freelancer?
How to pay quarterly taxes
The easiest way to make quarterly tax payments is to make them online. IRS Direct Pay is an online portal where you can make payments from a connected bank account. Select “Settlement Payment” and follow the instructions to proceed with sending the payment.
If you anticipate that you will need to make regular quarterly payments now and in the future, you can create an online account with the IRS. Not only will this allow you to make payments, but it will also give you access to your tax records.
When you make quarterly payments, be sure to upload your proof of payment after submitting your payment. Save it with the rest of your tax documents in case you need to refer to it later.
If you are not sure how much you need to pay, you can use the IRS Worksheet 1040-ES to find out. It’s a 15 step form that isn’t the most intuitive but can help point you in the right direction.
In addition, you can estimate the amount you think you owe for the year and divide it by four. For example, if you think you owe $20,000 at the end of the year, you should plan to pay $5,000 every quarter.
Review your tax returns for previous years to get an idea of how much taxes you previously owed. While this isn’t the best way to determine how much you really owe, it’s a good starting point for working off.
Read more: How to file income tax
Consider hiring a tax preparer (or use tax preparation software)
If you’re having trouble filing your estimated quarterly tax payments, it might be time to hire a tax preparer. These experts can help you understand your tax liability and calculate your expected payments. Not to mention, they can also help you maximize your earnings.
If you’d rather do it yourself, tax preparation software might be the best deal for you. Tax software can do some of the hard work for you while keeping you in the process. Most tax programs are intuitive and easy to use, but each one is slightly different.
Read more: The best tax software, compared
What happens if you don’t pay quarterly taxes?
If you don’t make quarterly tax payments during the year, you could end up with a huge tax bill at the end of the year. If you cannot pay it in full, you risk underpaying taxes.
As a result, you may be charged interest, penalties or other fees. The amount of the fine, and whether there is any, may depend on how much money you make and what your overall tax burden is.
You will be charged interest
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If you underpay taxes, interest may be levied on everything you owe. The interest rate varies, so your debt may differ depending on the quarter in which it is assessed. Interest rates are updated quarterly and are published on the IRS website.
You will know if you are eligible for interest if you receive an IRS notice in the mail. It may take time for the IRS to discover that they were underpaid. You may not receive a letter from the IRS until months or even years after filing your tax return. Everything you owe earns interest. This is why paying taxes quarterly is so important.
You may be subject to other fines and fees.
In addition to interest, you may be subject to other penalties or fees. The IRS charges a late fee if you miss the quarterly tax deadline. This penalty starts at 0.5% of the balance you owe.
Some people may decide to accept a penalty due to cash flow restrictions. This is especially true if you are starting a new business. Before you miss payments, speak with a tax professional to determine what action to take in your particular situation.
Read more: Should I Hire a Tax Inspector?
Summary
Filing taxes can be tricky, especially if you are self-employed or run your own business. The IRS tries to make this easier by allowing you to make settlement payments quarterly throughout the year.
If you have multiple sources of income or want to take advantage of the benefits of self-employment, it may be a good idea to work with an accountant or tax professional. They can help you ensure you get paid on time, avoid penalties, and get as many deductions as possible. This can be a valuable way to not only pay your taxes correctly, but also learn more about how the tax system works.
