Business owners, freelancers, and even Uber drivers need to make quarterly tax payments. Why? Because they’re contractors, not employees. Most companies don’t include contractors in their payroll. Instead, they pay contractors after they perform a service or after an invoice has been submitted.
When you’re on a company’s payroll the taxes you owe are typically withheld from your paycheck. Contractors have to withhold their own taxes.
Contractors are also responsible for an additional Self-Employment Tax, too. This is the contribution to Medicare and Social Security that an employer usually pays on your behalf. When you work as a contractor, you’re not only responsible for withholding your own taxes, but you have to pay the taxes your employer usually pays too.
Quarterly tax payments can help self-employed workers break their tax obligation down into more manageable payments. You’ll want to make quarterly estimated payments to the IRS for all non-W-2 work you do. If you don’t, you could not only get stuck with a large tax bill at the end of the year, but you could be liable to pay interest on what you owe. This guide will walk you through everything you need to know about making quarterly tax payments.
What’s Ahead:
Who has to pay quarterly taxes?
Anyone who works for themselves will have to make quarterly tax payments. This includes individuals who are freelancers, use a gig economy app like Uber, or earn an income through other business 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. Full-time employees have taxes withheld every time they are paid. They just don’t see the taxes that are withheld from their paycheck because their employer withholds the taxes for them. If you’re transitioning from W-2 employment to self-employment, realizing you have to pay taxes as you earn money can come as quite a surprise.
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Aside from working for yourself, there are a few other sources of income that may also require you to make quarterly tax payments:
- Rental income — If you earn rental income on your home, it is subject to taxes. This can be income you earn from a tenant as well as a short-term rental like Airbnb. Retain a portion of the income you earn and set it aside to make quarterly payments.
- Investment income — Anytime you sell an asset it creates a taxable event. Depending on how frequently you trade and whether or not you’ve held it for more than a year, you might be liable to pay capital gains tax. This, combined with any interest or dividend income, can be subject to taxation as soon as the money hits your bank account.
- Retirement income — Your retirement may be subject to taxes once you begin making withdrawals. Your 401(k), for example, is a tax-deferred retirement account. This means you don’t pay taxes on the money you invest now, but when you retire it will be taxed as if it was income. You can elect to have taxes withheld or to pay quarterly taxes on your own.
- Receiving a large windfall, such as winning the lottery — When you receive a large sum of unexpected money — such as winning the lottery — it is subject to taxes as if it were income. Depending on the source of the windfall and where you live you might elect to take small disbursements over time and pay quarterly taxes rather than taking a lump sum all upfront.
- Alimony — If you get divorced and receive alimony payments from your spouse you don’t have to count the money as income. If, however, you are the one who has to make alimony payments to your spouse, you are liable for paying taxes on the money they receive. Alimony taxes aren’t automatically withheld so it could be a good idea to set aside some cash to make quarterly tax payments.
- Income distributions from a business partnership — Businesses don’t withhold taxes for distribution payments. These are the earnings you receive not as an employee, but as a partner or owner of the business. Typically, distribution earnings are reported on Form K-1. Business partners are liable for their own tax obligations so planning on making quarterly payments is recommended.
When are quarterly taxes due?
Quarterly estimated tax payments are due four times each year. The payment due dates are as follows:
- April 15 — For income earned between January 1 – March 31
- June 15 — For income earned between April 1 – May 31
- September 15 — For income earned between June 1 – August 31
- January 17 — For income earned between September 1 – December 31
The IRS recommends that anyone who thinks they’ll owe $1,000 or more when they file their taxes to make quarterly payments. This includes income earned from a regular W-2 job — and subject to withholding — as well as any income you earn through self-employment or gig work.
It can be hard to plan ahead for taxes, which means there’s a chance you could either overpay or underpay. If you pay too much, you’ll get your money back as a refund. If you underpay (meaning you didn’t pay enough in taxes), you’ll be subject to penalties. You can use the IRS’s free tax withholding calculator to determine how much you owe.
Read more: How much should you budget for self-employed taxes 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 ‘Estimated Payment’ and follow the prompts to proceed with submitting your payment.
If you anticipate needing to make regular quarterly payments now and in the future, you can create an online account with the IRS. This will not only allow you to make payments, but it will give you access to your tax records too.
When you make quarterly payments make sure to download a payment confirmation after your payment is submitted. Keep this with the rest of your tax documents just in case you need to reference it later.
If you’re unsure how much you need to pay, you can use IRS Worksheet 1040-ES to help you figure it out. This is a 15-step form that isn’t the most intuitive to use but can help point you in the right direction.
Alternatively, you can estimate the amount you think you’ll owe for the year and divide it by four. For example, if you think you’ll owe $20,000 at the end of the year then you’ll want to plan on making a $5,000 payment every quarter.
Look at your tax filings for previous years to get a sense of how much you’ve previously owed in taxes. While this isn’t the best way to determine what you’ll actually owe, it is a good starting point to work off of.
Read more: How to file income taxes
Consider hiring a tax preparer (or use tax preparation software)
If filing your estimated quarterly tax payments is sending you for a loop, it might be time to hire a tax preparer. These experts can help you understand your tax liability and keep your estimated payments straight. Not to mention they can help you maximize deductions too.
If you prefer to do it yourself, tax preparation software might be a better deal for you. Tax software can do some of the heavy lifting for you, while still keeping you involved in the process. Most tax software is intuitive and easy to use, but each one is a little different.
Read more: Best tax software, compared
What happens if you don’t pay quarterly taxes?
If you don’t make quarterly tax payments throughout the year, you might find yourself stuck with a huge tax bill at the end of it. If you can’t pay it in full you’ll be at risk of underpaying your taxes.
As a result, you could be charged interest, penalties, or other fees. How much the penalty is and whether you are charged at all can depend on how much money you make and what your overall tax burden is.
You’ll be charged interest
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If you underpay your taxes whatever you owe might be subject to interest. The interest rate changes so what you owe might be different depending on the quarter it is assessed. Interest rates are updated quarterly and are published on the IRS website.
You’ll know if you are subject to interest if you receive an IRS notice in the mail. It can take time for the IRS to discover they were underpaid. You might not get a letter from the IRS until months or even years after your underpaid tax filing. In the meantime, whatever you owe is accruing interest. That’s why paying quarterly taxes is so important.
You could be charged other penalties and fees
On top of interest, you might be charged other penalties or fees. The IRS assesses a late payment fee if you miss the quarterly tax deadline. This penalty starts at 0.5% of the balance you owe.
Some individuals may choose to take the penalty due to cash flow constraints. This is especially true if you are starting a new business. Before skipping payments talk to a tax professional to determine what course of action you should take for your individual situation.
Read more: Should I hire a tax preparer?
Summary
Filing taxes can be complicated, especially if you work for yourself or run your own business. The IRS tries to make it easier by allowing you to make quarterly estimated payments throughout the year.
If you have multiple streams of income or want to take advantage of self-employment benefits, it can be a good idea to work with an accountant or tax preparer. They can help you make sure you make payments on time, avoid penalties, and claim as many deductions as possible. This can be a valuable way to not only pay taxes the right way but to learn more about how the tax system works, too.
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