When are Quarterly Taxes Due?
Being self employed has a lot of perks. You may get to choose your work hours, who you work with and where you work. However, working for yourself can be a lot to keep track of, such as figuring out when quarterly taxes are due, getting clients, promoting yourself, and managing your workload. Figuring out your taxes can feel like an afterthought.
Despite being important, filing your quarterly taxes on time does not have to feel complicated.
This article is going to give you all the information you need to determine:
- If you need to file quarterly
- How much you have to pay in estimated taxes
- When quarterly taxes are due
- What happens when you miss a deadline
- The safe harbor method to avoid a tax penalty
- The easiest saving plans, and how to pay your quarterly taxes
- Why you need to automate your expense tracking to lower your tax bill
Before you need to know when to file your taxes, we must identify if you have to file your taxes quarterly or annually.
Who Pays Quarterly Taxes?
Many new small business owners and freelancers assume that they can file their taxes annually because that is what everyone else does. This is a huge mistake because anyone who is an independent contractor or business owner has to pay taxes quarterly if they expect to pay over a certain amount.
The Internal Revenue Service (IRS) states that all individuals, sole proprietors, partners, and S corporation shareholders, have to make quarterly tax payments if they expect to owe $1,000 or more.
The amount varies slightly for corporations. They have to make the quarterly tax payments if they expect to owe as little as $500 or more.
If you are a freelancer, one person business, independent contractor, or classified as a non employee then you will most likely go by the $1000 or more rule.
If you receive a salary or wage from an employer, then usually the company you work for withholds the proper taxes from your earnings when you file a Form W4, Employee Withholding Certificate. Along with employees, if you meet these 3 criteria, then you don’t have to pay quarterly.
You don’t have to pay estimated quarterly taxes if:
- You didn’t have tax liability for the prior year
- You were a U.S. citizen or resident for the entire year
- Your last tax year covered a 12-month period
This means that if you didn’t have to file your taxes for the last calendar year or your total owed was zero, then you won’t have to file. Pretty much everyone has to file.
If you are just starting out, you may wonder how am I supposed to estimate what I am “expected to owe”?
How much Estimated Income Taxes Do I Pay?
Figuring out how much you need to pay the IRS can be complicated because how much you owe varies between each person. Your estimation will be a combination of your gross adjusted income, federal/state tax brackets, self employment tax rate, and any applicable credits.
Your federal income tax bracket depends on your income level. State brackets vary, some use the federal brackets or they make their own.
The easiest tax rate to figure out is self employment, also known as Federal Insurance Care Act (FICA) taxes, which includes Medicare and Social Security. At the time of writing this article, self employment taxes are 15.3%. As an employee, you only have to pay 7.65% of the FICA tax because your employer matches the other half. By being self employed they consider you both the employee and the employer, so you have to estimate your payment based on the full 15.5%. To figure out the other tax rates you owe, the IRS made a worksheet that will help you.
How to Calculate Your Quarterly Payments
To estimate your payments, the IRS suggests using their Form 1040-ES Estimated Tax for Individuals. The worksheet walks you through how to find your adjusted gross income, applicable credits, and what tax percentages you owe. The problem with this method is if you estimate your earnings too high or too low, you have to do the calculations again before the next filing deadline.
An easier way to accurately estimate your payments is to use a free estimated tax calculator.
By using the calculator you will be able to gauge your taxable income more precisely so you can minimize the chance of a underreporting penalty. To ensure that you don’t get penalized, use one of the IRS approved methods to for your tax preparation in combination with the quarterly calculator.
The Safe Harbor Method
The IRS knows that as an independent contractor your income will go up and down. So they created the safe harbor method to help protect yourself from penalties. If you follow this set of rules, then you won’t usually get in trouble with the IRS for not paying enough.
You will not receive a penalty:
- If you pay 90% or more of the amount you owe over the 4 payments
- When 100% of the previous year’s tax bill is paid
- If you divide your annual estimated tax into four equal parts and pay that estimation. This works better for taxpayers who have a consistent income as opposed to an income that changes with the seasons. They call this the annualized income installment method. To do this, you need to file the Form 2210, Underpayment of Estimated Tax by Individuals, with your annual return. This will help the IRS know if you underpaid for the prior year.
Once you know how much you have to pay, then you need to know when they are due, so you can prepare for the deadlines.
When Are Estimated Tax Payments Due?
The IRS wants your estimated payments divided up by 4 times a fiscal year at the bare minimum. If it works better for your business, they let people pay weekly, bi-weekly, or monthly as long as you’ve submitted the total estimated amount by the end of the quarter.
The due dates to file your estimated payments are:
First Quarter - April 15th
Second Quarter - June 15th
Third Quarter - September 15th
Fourth Quarter - January 15th
*These dates changed during the current year of 2020 and are subject to change in 2021 due to the coronavirus (COVID-19).
Have all your information ready well before your current due date because the IRS is not forgiving if you miss the deadline.
Unless the deadline lands on a weekend or legal holiday, then the federal government will change the due date to the next business day.
What If I Miss The Quarterly Tax Deadline?
Many people don’t file their quarterly taxes if it's their first year being self employed. Considering what happens if you miss a quarterly estimated tax payment, it is a huge priority. This is very problematic because the IRS adds a penalty of 0.5% of the tax owed literally the day after the payment deadline. The longer you don't pay, the higher the penalty gets, ultimately stopping at 25% of the original amount owed.
Save yourself a world of pain and file your taxes before the due date. Many people get stuck on knowing the exact amount of file, which could cause them to be late. To avoid this, use an online calculator to help you with the exact rate you need to save.
Make sure to have a proper savings plan in place to protect yourself from the IRS.
Savings Plans for Quarterly Estimated Tax Filing
Many freelancers don't make a savings plan for their estimated payments. As the great Benjamin Franklin once said, “If you fail to plan, you are planning to fail.”
If you don’t have a savings strategy, you can easily over spend. Business expense tax write offs are not allowed to be submitted with your quarterly taxes. You have to submit your business tax deductions when you file your annual taxes for the following year.
This means that you need to pay the total amount of taxes due for each quarter and have enough tax withheld from your earned income. There are several saving methods to choose from to ensure you save the proper amount for tax filing.
No matter which method you choose, you need to calculate the exact percentage so you know how much money to set aside for 1099 taxes.
Monthly Transfers to a Separate Bank Account
For more experienced freelancers, the simplest way is to calculate how much you owe monthly on average and deposit it into a separate savings account. Let’s say you use the annualized income installment safe harbor method. For example, if you discover that you have to pay $10,000 in taxes per year. This comes out to $2,500 per quarter or $834 per month. When you set this money aside, it will sit in your account until you are ready to file.
This method works best for people who know what they earn and want to save time by not calculating what they owe for each transaction.
Save by Each Income Payment
The most accurate technique to save the proper amount for a beginning independent contractor is to figure out the total tax percentage you owe. Then multiply it by and the total income for that month. This will give you the exact number that you need to save for that month. Once you have this number, add up the totals for every month in the quarter. That is your quarterly estimated payment.
This technique is accurate for people just starting out because they can't estimate what they will make for the year if they don't know. The beauty of this method is it uses your own real life data to create a savings plan.
With a proper savings plan in place, you are ready to report your quarterly income.
How Do I Pay Quarterly Estimated Taxes?
Being self employed can be very hectic. Figuring out how to calculate your own estimates and fill out the proper forms can become an inconvenience that keeps you from doing more work.
If you calculate the wrong amount, then you will be overpaying on your taxes. When you underpay, then you will get penalized with interest fees, as discussed. You want to get the amount just right.
The IRS allows you to pay your estimated taxes using a debit or credit card with the Electronic Federal Tax Payment System (EFTPS) also known as Direct Pay. Or you can mail in a check, cash, or money order with your quarterly estimates using Form 1040-ES.
Before making your payment check with your local government for their own tax laws.
Check With Your State
Each jurisdiction has their own rates, forms, or even due dates. Some states even have no income tax such as Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Make sure to consult with the tax agency in your state to make sure you abide by all the laws.
Automate Your Expense Tracking to Use Tax Deductions
The IRS does not allow you to take tax deductions in your quarterly taxes, but you need to have a system in place for when you file your annual tax return. If you want to get a deduction on your bill, then you need to write off your business expenses correctly.
Going through your tax deductible business expenses individually, takes valuable time away from you. It is an excellent idea to automate and outsource this portion of your business so you can focus on making more money. Keeper Tax is a world class online software that automatically tracks your 1099 tax write offs you've been missing.
Along with keeping a detailed record, the best line of defence against the IRS is to have a professional tax agent review your tax deductions before filing them. It helps tremendously to have a secondary set of eyes check your work to ensure you are protected in case of an audit.
Instead of paying $300 for a CPA, Keeper Tax assigns each of their subscribers a personal tax agent for a low monthly fee. This will help you save more money so you can invest it back into your independent contracting business.