When you work as an employee, your employer withholds some money from your paychecks to send to the Internal Revenue Service (IRS). At the end of the year, you’ll most likely get a nice big tax return check for how much you overpaid throughout the year.
As an independent contractor or self-employed worker, things are a little different. For one, you don’t get a nice big refund, but instead...drum roll, please...
You’ll owe money!
Estimated tax payments are required for those who get paid without their income withheld by the IRS based on the amount of income you earn. Simply, the IRS wants to make sure they get paid in taxes on the money you earn.
In order to ensure they get those payments, income made by taxpayers that is not subject to tax withholdings is required to pay estimated taxes four times a year.
So, what happens if you miss a quarterly estimated tax payment?
In short, you’ll need to make the estimated tax payments by those dates to avoid any penalties or interest. Even if you miss the deadline by a day, you’ll still be penalized.
Quarterly tax payments are typically due on:
The IRS expects you to make your quarterly payments promptly before those dates. If you miss it, you’ll want to ay the quarterly tax payment as soon as you can. Some people might think, “Oh, I already missed this quarterly payment, I’ll just wait until next quarter to make it up…”
That is a big mistake. Here’s why.
The underpayment penalty is worked out by looking at the sum you owed and the time it took you to before you paid. In other words, you’ll pay a lot more the longer you wait. So, if you want to keep the penalty to a minimum, all you have to do is pay the amount as soon as possible.
If you miss a quarterly tax payment, the penalties and interest charges that can accrue depend on how much you make and how late you are.
The IRS typically docks a penalty of .5% of the tax owed following the due date. For each partial or full month that you don’t pay the tax in full on time, the percentage would increase. The penalty limit is 25% of the taxes owed.
Here is the IRS’s full breakdown of how much you can owe for missing a quarterly tax payment.
We’ll break down how to calculate your quarterly tax payments.
To calculate your quarterly taxes, all you have to do is add up how much taxes you owe for the year (self-employment tax, income tax, and any other taxes), and divide that number by four.
If you’re not sure how much you’ll owe at the end of the year, you can use our estimated tax calculator to get an estimate of how much you should be paying for your quarterly taxes.
Also, the IRS offers a worksheet, Form 1040-ES, for individuals to walk through the calculations
I hope we made it easy for you to understand what happens if you miss a quarterly estimated tax payment.
If you miss your quarterly payments, not all hope is lost. You can actually apply to waive the penalty to the IRS. You’ll need to complete an IRS Form 2210 and submit it with your tax return to request a waiver when you file. Along with the form, you’ll need to provide an explanation with the proof for why you weren’t able to pay estimated taxes in the specific time period that you’re requesting a waiver for. An example of proof that qualifies for approval would be documented records from the hospital, disability, insurance, police, or retirement documents. If you overpay, you will get a refund for the amount.
If you have questions, concerns, or need help with your waiver for your quarterly tax penalty, we recommend you speak with an experienced tax professional or drop us a line for some help.
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