If you have recently started a side-gig or even branched out on your own to become self-employed you may be wondering, how does the IRS tax the money I’m earning? If you work for a company you typically receive a W-2 and the company will automatically deduct payments from your paycheck for tax. However, if you are self-employed this onus falls on you.
As a general rule, you will need to make quarterly tax payments to the IRS if:
- You expect to owe $1,000 or more of taxes even after withholdings and credits.
- Your withholding and credits will cover less than 90% of your tax liability for this year or 100% of your tax liability for the previous year.
Still unsure if you will need to make quarterly tax payments to the IRS? Don’t worry, in this article, we will cover if you need to make payments, how to calculate them, how to make them, and what happens if you don’t make payments.
Who Needs to Make Quarterly Tax Payments?
If you are still unsure if you need to make quarterly tax payments, consider this. Are you earning an income that has not been subject to taxes? If you answered yes to this question, then you most likely need to make a quarterly tax payment to the IRS.
Independent contractors and freelance workers are the most common group of people who fit into this category. Some clients that you work with may issue a 1099-NEC, which usually indicates that they have reported what they’ve paid you to the IRS. You’ll notice on the 1099-NEC that your client has not deducted any taxes from your pay.
Even if you do not receive a 1099-NEC it’s still good practice to report your earnings and pay quarterly taxes on them. If you’re caught not paying taxes on these earnings, the consequences could be severe.
How to Estimate My Quarterly Tax Payments
The IRS requires you to fill out a form 1040-ES to declare how much tax you’ll estimate owing on a quarterly basis. This can be difficult if your income fluctuates through the year.
A good starting place is to look use your previous year’s return and estimate that you will pay 110% of the taxes you paid last year. If you are intending on ramping up your business or anticipating a large boost to your income, make sure to account for this when estimating your quarterly payment.
What if I Overestimate How Much I Make?
Independent contractors and freelancers can’t always make accurate estimates. You may lose a large client, have an unexpectedly large business expense, or decide that the self-employed life just isn’t for you.
If you grossly over-estimated or under-estimated your quarterly tax payments, you are able to file a new 1040-ES during the year. When completing your end-of-year taxes, you will need to file an IRS form 2210 to explain why you didn’t pay equal quarterly payments.
Additionally, if you have the cash on hand to cover an overestimate, you can always just pay your quarterly payment as is and either get a tax return at the end of the year or apply the overpayment to next year’s taxes.
When Are My Quarterly Tax Payments Due?
To make matters more confusing, quarterly tax payments aren’t actually due during the typical fiscal quarterly periods. The below chart gives you the due dates for taxes during the 2021 period:
|Period of Earnings||Tax Payment Deadline|
|January 1 – March 31||April 15|
|April 1 – May 31||June 15|
|June 1 – August 31||September 15|
|September 1 – December 31||January 18|
If the idea of paying a large lump sum of taxes on a quarterly basis seems daunting, you are able to make smaller payments on a monthly basis. The IRS has a direct pay website and as long as you’ve paid the amount of estimated taxes owed by the deadline you are good to go.
For instance, if you estimate owing $3,000 each quarter you can make a monthly payment of $1,000 each quarter to the IRS and not be penalized.
What If I Don’t Make a Quarterly Tax Payment?
If you’ve missed a quarterly payment or are intentionally not paying it, the IRS will charge you a 0.5% penalty for each month (or partial month) that you have not paid with a maximum of 25% charged. Additionally, they will charge interest on the owed money.
Therefore, it’s in your best interest to pay any missed payments as soon as possible. If you were a victim of a disaster or casualty, or your missed payment was due to “reasonable cause” rather than “willful neglect” the IRS may be willing to reduce the penalty.
Is There a Way to Avoid Quarterly Tax Payments?
If you’re earning untaxed income as a result of a “side gig” and are working a full-time job that you do pay income tax you can avoid paying quarterly payments.
In order to not pay quarterly payments to the IRS, you should adjust the W-4 for the job that does withhold income tax so that your withholdings cover any owed taxes from your side gig. Note that this will affect the amount you get back on your tax return at the end of the year, but it will prevent you from having to make a quarterly payment.
If you do go this route, it’s best to withhold 30% of your income for taxes in the case that you made an error in calculation and end up owing more than you expected in back taxes. If your calculations were correct, then you have your own version of a “tax refund” at end of each year!
When to Get Help with Quarterly Tax Payments?
As you can see, determining if and when you should make quarterly payments is not a straightforward process. If you’re unsure about if and you much you should pay contact us to help you prepare your 1040-ES.
Additionally, if you’ve missed your quarterly payment or owe a lot of money in penalty fees you should contact us as soon as possible. We can help you work with the IRS to potentially save thousands of dollars on owed back taxes.