Self-Employed Quarterly Taxes: Know What You Owe
If you are self-employed, the words “quarterly taxes” and “estimated payments” likely send a shiver down your spine. Not to worry! We've created the ultimate guide to quarterly taxes to make estimated payments a breeze.
In this guide, you'll learn what quarterly taxes mean to you, how to determine if you should pay quarterly taxes, and how to pay them if you do. If you find this content helpful, you may like to try our app, Stride Tax, which makes it easy to record tax deductible expenses and mileage year-round.
What Are Quarterly Taxes?
Quarterly taxes are estimated tax payments to the IRS made throughout the year (instead of all at once on Tax Day in April). These payments are based on an estimation of your income for the current year. Most people use their previous year’s taxes as a guide.
Everyone is required to pay taxes. If you’re self-employed or work for the man, your taxes are paid in one of two ways:
Withholding taxes from your paycheck (W-2 workers)
Paying quarterly taxes (1099 workers)
Traditional (W-2) employees usually don't owe quarterly taxes because taxes are withheld from their pay. However, if you are self-employed (ie: real estate agents, Uber drivers, or any freelancers or contractors), taxes are not withheld from your pay. That's right—you are responsible for paying taxes on your own!
How Do I Know If I Owe Quarterly Taxes?
If you are self-employed and turning a profit, you probably owe quarterly taxes.
However, it’s possible that you’re already paying enough in taxes during the year. For example, if you have a W-2 full-time or part-time job where your taxes are already being withheld for you and you typically get a tax refund, you may not need to pay quarterly taxes.
Alternatively, you do not need to pay quarterly if you have already paid at least:
90% of your estimated tax owed for the current year
100% of the tax amount owed shown on your return for the prior year
In this case, your tax liability is already almost completely covered. Keep in mind, this is most common for people who have received a refund for the previous year’s tax and use that to pay their upcoming year’s taxes. For example, if you received a refund on your 2017 taxes in April and elected to pay it toward your 2018 taxes, you may be covered for estimated taxes, but only if that refund equals 90% of your expected 2018 taxes or was equal to 100% of your 2017 taxes owed.
What If I Didn't Earn That Much?
Even if you only earned a little, you may still need to pay quarterly taxes. If you expect to owe $1,000 or more in taxes for the year (after deduction and credits), the IRS expects you to make quarterly tax payments on your business profit for that tax year. As a reminder, you are making a profit if your self-employment income is higher than your business deductions.
Put simply: if you have income that didn't have taxes withheld and you expect to owe $1,000 or more in taxes on all of that combined income in April, then you should consider paying quarterly taxes.
Filing Quarterly Taxes and Payment Methods
You will need to file Form 1040-ES to file quarterly taxes. You can either file this form by hand, or use a tax filing software such as TurboTax and TaxAct to help you calculate what you owe. Wondering how Form 1040ES and Form 1040 differ? Form 1040 is used to report estimated tax, while Form 1040 is used to report your actual income. Here are the three steps you'll want to follow:
Step 1: Calculate what you owe.
Form 1040-ES will ask you to use your expected adjusted gross income (AGI) to estimate your owed tax. If you expect to earn a similar amount to last year, your AGI from last year is a good starting point to determine what you will make in the upcoming year. Adjust it up or down, depending on how much you expect to make this year. You are shooting for a ballpark estimate. Once you have your expected adjusted gross income, run your AGI through the appropriate tax rate schedule to find your owed tax, and then divide your owed tax by 4 to find what you owe for each quarter.
When you are calculating what you owe each quarter, keep in mind that you need to pay 25% of the total that you expect to owe in a year instead of estimating what you’ll owe in each quarter. This can be especially tricky for self-employed taxpayers with income that varies throughout the year.
Step 2: Mail in your Form 1040-ES. You can find the correct address on the IRS website.
Step 3: Choose a payment method. You can select a payment method on the IRS website or mail your check with your Form 1040-ES.
What Happens If I Don’t Pay Quarterly Taxes and Wait until April?
If you owe more than $1,000 in taxes and do not pay taxes quarterly, you’ll be hit with an underpayment penalty by the IRS. Ouch!
However, you may be able to avoid the penalty if you meet either of these qualifications:
You didn’t pay due to a disaster or an “unusual circumstance.”
You retired or became disabled during the tax year.
You can find out how to declare these waivers on page 2 of the instructions for Form 2210.
Quarterly Tax Deadlines
Taxes come with a bunch of important deadlines. The 2019 quarterly tax deadlines are:
Q1 Deadline: April 15, 2019
File estimated taxes for January 1 to March 31
Q2 Deadline: June 17, 2019
File estimated taxes for April 1 to May 31
Q3 Deadline: September 16, 2019
File estimated taxes for June 1 to August 31
Q4 Deadline: January 15, 2020
File estimated taxes for September 1 to December 31
I Still Have Questions. How Do I Get Help?
Stride is here to help you with self-employment taxes so you can have more time to do the work you love. Email us with questions on quarterly payments or any other questions you may have.