aying taxes is a big part of being an adult. And if you’re a small business owner or freelancer, you’ll find that paying taxes looks a little different for you than for someone who receives a salary or wages and pays their taxes throughout the year by having a portion of their income withheld from their earnings. Mastering paying your quarterly taxes can help you run a successful company, so you want to be sure to make the correct payments and make them on time.
But we know this is all really confusing. That’s why we’ve compiled this guide, to help you figure out if you should be filing your taxes quarterly, and if so, exactly how to do it.
Keep reading if you want to know:
- What annual taxes are
- What quarterly taxes are
- When you should file taxes quarterly
- How to calculate quarterly taxes
- How to make quarterly payments
- Quarterly taxes myth-busting
- 2021 quarterly payment due dates
What are Annual Taxes?
The Internal Revenue Service (IRS) determines how much each household owes annually by weighing gross income for the calendar year and adjusting it for certain exceptions, credits, and deductions.
People who receive a salary or wages pay their taxes throughout the year by having a portion of their income withheld from their earnings. The final amount owed is then balanced when they file their annual income tax return. This typically occurs in April of the following tax year.
But not everyone has a portion of their income withheld through their earnings throughout the year, and these people still need to pay taxes. This is when filing quarterly taxes come into play.
What are Quarterly Taxes?
Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments.
According to the IRS, if the amount of income tax withheld from your salary or pension is not enough, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards, you may have to make estimated tax payments. If you are in business for yourself, you generally need to make estimated tax payments.
Estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax.
If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late.
Estimated tax requirements are different for people like farmers and fishermen. Publication 505, Tax Withholding and Estimated Tax, provides more information about these special estimated tax rules.
When You Should File Taxes Quarterly
You have to pay estimated quarterly taxes depending on the sort of work you do or how you are paid.
You are required to file taxes quarterly if:
- You aren’t having enough withheld
- You are self-employed
- You receive untaxed income
If You Aren’t Having Enough Withheld
You need to pay estimated quarterly taxes if you expect you’ll owe at least $1,000 in federal income taxes this year. This still applies even after accounting for your withholding and refundable credits (such as the earned income tax credit).
You also need to pay estimated quarterly taxes if your withholding and refundable credits will cover less than 90% of your tax liability for this year or 100% of your liability last year - whichever is smaller.
You Are Self-Employed
Anyone who is self-employed may be required to pay estimated quarterly taxes.
A self-employed person is someone who:
- Is an independent contractor
- Is a freelancer
- Has side gigs
- Works in a trade or field as a sole proprietor
- Is a member of a partnership that conducts business, such as an LLC
- Runs a business on their own, including a part-time business
People who are self-employed are required to pay estimated quarterly taxes because there’s no tax automatically withheld on their income. A self-employed person’s estimated taxes will pay for their income tax, self-employment tax, and alternative minimum tax.
You Receive Untaxed Income
You may need to make estimated quarterly tax payments if you receive income from interest, dividends, alimony, capital gains, prizes, or awards. This may also include rental income and other investments, so landlords and investors may have to make quarterly tax payments.
How to Calculate Quarterly Taxes
One way to do this is to estimate the amount you’ll owe for the year and then send one-fourth of that to the IRS. For example, if you think you’ll owe $10,000 for the year, you’d send $2,500 each quarter. This works best for people whose income is pretty much the same throughout the year and for people who have a good idea of what their income is going to be.
Another way to calculate quarterly estimated taxes is to estimate your annual tax liability based on what you’ve already earned during the year. This is better for people whose income varies. Essentially, you annualize your tax at the end of each quarter based on a reasonable estimate of your income and deductions so far this year. The IRS has a worksheet to help you figure out what that amount would be.
However you choose to calculate your quarterly estimated taxes, you’ll need to use IRS Form 1040-ES to show your estimated income and project your tax liability. IRS Publication 505 has all the rules and details, and good tax software or a qualified tax professional will help you fill out the form and do the math.
If by chance you overestimated or underestimated your earnings, you can complete another form to change your estimated tax for the next quarter. This form is called Form 1040-ES.When you file your annual return, you’ll need to attach an extra form to explain why you paid different amounts for different quarters. This form is called IRS Form 2210.
If you paid too much in taxes, you can get a refund or have the amount go to future payments.
How to Make Quarterly Payments
Once you’ve figured out your quarterly payments, you can submit them online through the Electronic Federal Tax Payment System or you can pay using paper forms supplied by the IRS.
When you file your annual tax return, you will pay the balance of taxes that were not covered by your quarterly payments, and you can use your new total annual income to estimate your quarterly payments for the next tax year.
Quarterly Taxes Myth-Busting
There are a couple of misconceptions about quarterly tax payments, but one of the more serious ones is that taxpayers think they can just pay their estimated taxes in one large sum at the end of the year. It's a mistake to think the IRS is okay with an end-of-year payment.
If you owe more than $1,000, the IRS wants you to pay your taxes during the year. Any missed quarterly payments will result in penalties and interest. Waiting until the end of the year to file and pay taxes may also lead to other financial issues if you are unable to satisfy your accumulated debt.
Another common misconception is that if you miss a quarterly payment deadline you can wait and pay on the next deadline. But following the quarterly payment schedule is seriously important.
Missing quarterly deadlines by even one day can mean accruing penalties and interest. If you miss a payment deadline, you should send in your payment as soon as you can.
2021 Quarterly Payment Due Dates
These are the 2021 dates quarterly taxes are due. You should make sure to make these payments on time in order to avoid an underpayment of estimated tax penalty.
- 1st Quarterly Estimated Tax Payment - April 15, 2021
- 2nd Quarterly Estimated Tax Payment - June 15, 2021
- 3rd Quarterly Estimated Tax Payment - September 15, 2021
- 4th Quarterly Estimated Tax Payment - January 15, 2022
But you can make smaller payments more often if that works better for you. For example, it may be easier for you to make 12 smaller payments rather than four larger payments. If you owe $1,000 for the year, you can opt to pay about $84 a month instead of $250 four times a year.
Taxes are paid annually by people who receive a salary or wages and pay their taxes throughout the year by having a portion of their income withheld from their earnings.
Taxes are paid quarterly by people who aren’t having enough withheld, are self-employed, or receive untaxed income.
For people who fall under this umbrella, it’s important to follow the quarterly payment schedule so that you don’t accrue penalties or interest.