When you work for someone else, they are responsible for withholding a specific amount of income from each paycheck for taxes.
But when you’re self-employed, you’re responsible for your withholdings. That is why it is essential to calculate the amount you owe on the income you’re earning. Then you can either set it aside or pay quarterly payments. The choice is up to you. If you pay the right amount of taxes throughout the year AND you pay your taxes on time, you won’t be charged a penalty fee for underpayment of taxes.
So, should you be paying quarterly estimated taxes?
Am I self-employed?
Working for yourself means that your taxes are not withheld automatically from your income. If you have a side gig, side hustle, own a small business, or you work freelance, you are considered self-employed. The source, amount, and frequency of your income probably varies, which makes taxes even more confusing.
Should I pay quarterly payments or one lump sum?
To make sure you don’t miss a payment and wind up with a fine, the IRS encourages self-employed taxpayers to “pay as you go, so you won’t owe.” Keeping records of all your income and your expenses is extremely important and will make filing estimated taxes much more straightforward.
There are two reasons you should pay quarterly taxes. If you expect to owe $1,000 or more in taxes when you file your tax return, then you should pay estimated tax throughout the year. If you think you’ll owe less than $1,000 in taxes, you can pay it all at once when you file your tax return.
The second reason you may want to pay estimated taxes is if you did not pay a large portion of your taxes before you file your tax return. Even if you owe more than $1,000, if you paid about 90% of your taxes through withholdings or estimated taxes, then you will not be penalized. The specific percentages are 90% for 2020 or 100% for tax year 2018 and years prior.
What happens if I miss a quarterly tax payment?
If you miss the deadline for making a quarterly tax payment, the IRS will charge you. Even if you are only a day late, they will penalize you for underpaying your taxes. The amount of the penalty depends on how much you owe and how late you were in paying. If you pay immediately after the deadline, you will owe less than if you put it off.
How do I make quarterly tax payments?
As a first step, complete the worksheet portion of Form 1040-ES to figure the amounts of your estimated taxes. This form lists the payment due dates, as well as a list of documents needed to calculate the estimated tax. How and where to send payments is also detailed on this form.
What info will I need for Form 1040-ES?
Self-employed workers should be prepared to answer questions about their expected adjusted gross income, what portion of that is taxable, and credits and deductions. Having a prior-year tax return is especially helpful while completing Form 1040-ES.
How much will I owe each quarter?
How much you pay each quarter depends on a few factors, including significant life events such as a death in the family or divorce. Self-employed workers should also consider tax laws, which change frequently. It’s a good idea to reference the IRS website for guidance on this topic. And you can use TaxSlayer’s Refund Calculator to estimate your tax liability.
The information in this article is up to date through tax year 2020 (taxes filed 2021).