If you’re a small business owner, freelancer, or independent contractor, you’ve probably heard about quarterly estimated taxes. But what are they, and why are they so important? Failing to understand and pay these taxes could result in penalties, interest, and even a hefty tax bill come April. This guide will break down everything you need to know to stay on top of your quarterly tax payments, save money, and avoid unnecessary stress.
What Are Quarterly Estimated Taxes?
The IRS requires individuals and businesses that don’t have taxes automatically withheld from their income (like employees do) to pay their taxes throughout the year in quarterly installments. This includes self-employment tax, income tax, and sometimes additional taxes like the net investment income tax.
Who Needs to Pay Them?
You’re required to pay quarterly estimated taxes if:
- You expect to owe at least $1,000 in taxes after subtracting credits and withholding.
- You earn income that isn’t subject to withholding, such as:
- Freelance or contractor income.
- Small business earnings.
- Rental property income.
- Investment or dividend income.
How to Calculate Quarterly Estimated Taxes
The key to staying compliant with the IRS is calculating your estimated taxes accurately. Here’s how to do it:
- Estimate Your Annual Income
Calculate your expected income for the year, including all sources like business earnings, freelance income, and other taxable income streams. - Determine Your Taxable Income
Subtract any applicable deductions and credits to arrive at your taxable income. - Use the IRS Form 1040-ES
The IRS provides Form 1040-ES, which includes a worksheet to help you calculate your estimated taxes. This form accounts for both income and self-employment taxes. - Divide Into Four Payments
Take the total estimated tax liability for the year and divide it into four equal payments.
Pro Tip: If your income varies throughout the year, you can use the “annualized income installment method” to adjust payments based on when you earn income.
When Are Quarterly Taxes Due?
For most taxpayers, quarterly taxes are due on the following dates:
- April 15: For income earned January 1 – March 31
- June 15: For income earned April 1 – May 31
- September 15: For income earned June 1 – August 31
- January 15 (of the following year): For income earned September 1 – December 31
If the due date falls on a weekend or holiday, the deadline is moved to the next business day.
What Happens If You Don’t Pay?
Failing to pay quarterly estimated taxes—or underpaying—can lead to:
- Underpayment Penalties: The IRS imposes penalties based on how much you underpaid and how late the payment is.
- Accrued Interest: Interest charges can add up quickly on unpaid balances.
- Large Tax Bills in April: Without quarterly payments, you could owe a significant amount when filing your annual return.
To avoid these issues, always aim to pay at least 90% of your current year’s taxes or 100% of your previous year’s liability (110% for high-income taxpayers).
How to Pay Quarterly Estimated Taxes
The IRS offers several convenient ways to make your payments:
- Online: Use the IRS Direct Pay tool or EFTPS (Electronic Federal Tax Payment System).
- By Check: Mail your payment with the payment voucher from Form 1040-ES.
- Through Your Accountant: Many CPAs can assist with setting up and managing quarterly payments.
Tip: Always keep records of your payments to avoid discrepancies when filing your annual return.
Get Help with Quarterly Taxes
Staying on top of quarterly estimated taxes can be challenging, especially if your income fluctuates or you’re unsure how to calculate payments accurately. At Wong CPA Advisory, we work with small business owners and self-employed professionals to simplify the process, maximize deductions, and ensure compliance with IRS regulations.
Let us take the guesswork out of your tax planning so you can focus on growing your business. Contact us today to schedule a consultation and learn how we can help you minimize your tax liability year-round.