People who are paid by salary and earn a steady monthly paycheck don’t have to shoulder the burden of filing taxes and covering federal tax liabilities such as income tax, social security, and Medicare. That’s because their employer withholds taxes from their paycheck and matches them before it even hits their bank account. But what if you’re self-employed, a gig worker, or have income that is not subject to state income tax withholding? Do you still need to pay taxes?
Here’s what quarterly taxes are all about, how to pay them, and what you need to know when filing your tax returns is due.
Why are quarterly tax payments required?
Uncle Sam utilizes a pay-as-you-go tax system which means that if you are earning money that is not subject to withholdings (e.g., freelancing, stipends), you need to pay your tax bill throughout the whole year, as you earn the salary rather than paying it in one lump sum at the end of the year. The reason it’s called “quarterly” is that the tax is paid in four quarterly installments. These payments depend upon an estimation of your adjusted gross income from self-employment and what you expect your personal tax return will be for the year.
Taxes may not be a fun way to spend your time especially when you have to pay them four times a year. But if you map out these quarterly payments accurately and in a timely manner, it can actually ease the burden of tax duties. So, by the time the tax deadline approaches, you will have already paid the taxes in full.
Who needs to pay quarterly taxes?
According to the Internal Revenue Service (IRS), self-employed people who expect to have a tax liability of at least $1,000 and whose income is not automatically withheld from their earnings, they are generally required to pay quarterly taxes. Prime candidates for this are:
- Sole proprietors
- Independent contractors
- Small business owners
- S corporation shareholders
This can also include earnings from the following sources:
- Rental income
- Capital gains
- Prizes and awards
In other words, anyone with substantial taxable income that earns money from one of the above-mentioned sources needs to manage their own books and determine how much they owe based on your business earnings. If you wind up overpaying by the end of the year, you’ll get a refund.
Conversely, underpayment subjects you to an IRS penalty. Check out Form 2210 to see if you are subjected to any penalty for underpayment. Also, read Form 1040-ES, Estimated Tax for Individuals, and Form 1120-W for Corporation to see in more detail to whom quarterly taxes specifically apply.
Who doesn’t need to pay quarterly taxes?
You can avoid having to pay quarterly taxes if you receive a monthly salary and wage. You can do this by filing the Form W-4 with your employer, asking them to withhold a more significant proportion of your salary so that they can pay quarterly taxes on your behalf. If you look inside the W-4 form, you will see a special line that asks you to enter the amount you want your employer to withhold.
Generally, you are exempt from paying quarterly taxes if you meet the following conditions:
- You expect to owe less than $1,000 on your return.
- You had no tax liability for the prior year (2020)
- You were a U.S. citizen or resident for the whole year (2020)
- Your prior tax year covered a 12-month period (2020)
How to avoid penalties
In order to avoid underpayment penalties, it is essential to be as accurate as possible when calculating your quarterly taxes. Since tax liability can sometimes be difficult to estimate, especially if your income is irregular, the IRS offers a “safe harbor” method. To avoid penalties of underpayment, use one of the three safe harbors:
- Calculate what you owe for this year (2021) and pay 90% of that amount in four installments.
- Pay 100% of the tax liability for the previous year (2020)
- Pay 110% if your adjusted gross income is higher than $150,000 for married couples and $75,000 for singles.
When are quarterly taxes due?
The IRS offers you the option to pay taxes either as a single estimated tax payment or make four payments on a quarterly basis. Quarterly taxes are generally due in April, June, September, and January of the following year. The first quarter includes three calendar months (from January 1 to March 31), the second quarter is from April 1 to May 31. While the third-quarter payment is from 1st of June until 31 of August) and the last one covers the last four months of the year (September 1 to December 31).
Note: If the dates of the payment fall on a weekend (Saturday, Sunday) or national holiday, the payment is postponed to the next business day.
Keep also in mind that, apart from federal taxes, depending on which state or city you live in, you might need to pay quarterly taxes to your state too. Every jurisdiction has its own tax rates and different due dates, so make sure to double-check with the pertinent tax agency in your state.
How to pay quarterly taxes?
Now that you have a better understanding of how quarterly taxes work, you can go about setting up an IRS payment plan. Fortunately, payments for quarterly taxes are made easy thanks to the electronic system offered by the IRS. You can choose to make the payment using one of the following options:
You can pay by Credit Card, and the IRS will send you to an approved payment system. There is generally a fee for paying via Credit Card ($2.59 per payment, or up to 2% of the amount paid). Another method is using IRS Direct Pay which is a lot easier, and there is no fee.
Pay by phone
You can make the payment for free by enrolling in the Electronic Federal Tax Payment System (EFTPS).
Pay by app
IRS2Go is the official mobile app of the IRS. Using this app, you can make payments; you can get free tax help, check the status of your taxable income, and more.
Pay by cash
If you choose to pay in an old-school way, you can do so by visiting your local Taxpayer Assistance Center. Also, check the IRS form 1040-ES.
Establish a plan for managing your taxes
If you’re self-employed, calculating what you owe and paying taxes four times a year can be challenging. But as a sole proprietor or a freelancer, you’ll find that learning and mastering your quarterly taxes is an important aspect of keeping your business financially savvy during the whole year. So, it is recommended to mark calendars, manage your documents, make a financial plan and pay taxes on time.