Paying Quarterly Tax Estimates

Paying quarterly tax estimates is a necessary responsibility for self-employed individuals and business owners who don’t have taxes withheld from their income throughout the year. This process can seem daunting, but in retrospect it sets you up for success, because at the end of the year you won’t have a giant bill plus fines and interest. By breaking it down into smaller, more manageable steps, we aim to simplify the process. Here’s a practical guide to paying quarterly tax estimates in 5 simple steps.

 

Step 1: Figure out who needs to pay quarterly taxes:

Do you have to pay quarterly taxes? 

First question you should be asking yourself is, do you anticipate owing more than $1,000 when filing your annual return?

If you answered yes, then you have to figure out exactly how much you have to pay the IRS and they don’t really do a good job telling you

There are certain types of income that require you to pay quarterly taxes

Self-employed: Independent contractors, freelancers and even small business owners who expect to owe $1,000 or more in taxes  Because there is no tax automatically withheld on their income. This also includes dividends, realized capital gains, and other non wage earnings.

 

People who aren’t having enough withheld. The IRS says you need to pay estimated quarterly taxes if:

• You are expected to owe at least $1,000 in federal income taxes this year, even after factoring in your withholding and refundable credits.
•  Your withholding and credits will only cover less than 90% of your tax liability for this year, or 100% of your liability from last year, whichever amount is lower. If your adjusted gross income last year exceeded $150,000, the threshold is 110% or %75,000 for those married filing separately. 

• You may also have to make estimated tax payments if you are a W-2 employee, but the withholding on your earnings doesn’t fully cover your tax liability, meaning what you expect to owe for the tax year

 

Step 2: Know the quarterly tax deadlines 

If quarterly taxes are necessary, it is imperative to pay them promptly to avoid late payments and penalties. 

 

The final quarterly tax payment for 2023 was due by Jan. 16. Quarterly estimated tax payments for the 2024 tax year are due April 15, June 17, and Sept. 16. The final payment is due January 2025.

 

Since estimated taxes are typically paid on a quarterly basis, it is important to familiarize yourself with the quarterly tax payment deadlines. 

  Save these tax deadlines  in your calendar to avoid missing a payment next quarter.

Step 3: How to calculate quarterly estimated taxes

How do you know exactly what to pay? You don’t want to under pay and you definitely don’t want to over pay.

 

There’s more than one way to calculate your estimated taxable income for the year. The option that suits you best relies on your level of certainty regarding your estimated yearly earnings and tax obligations. 

 

• • Use Form 1040-ES. Obtain Form 1040-ES, provided by the IRS, which serves as a worksheet for calculating quarterly tax estimates. This form includes instructions and a payment voucher for each quarter. This will serve as the basis for estimating your quarterly tax payments.

• Estimate based on prior-year taxes. This option may work best for those whose income is pretty much the same throughout the year, or for business owners that have a good idea of what their income will be. To calculate your annual tax liability, you can take what you paid total for taxes in the prior year and divide it by 4 and that gives you your quarterly estimated tax payment for the current year. For example, if you anticipate owing $4,000 for the year 2024, you would send $1,000 every quarter. 

• Annualize.  If you think your business will gross more profit than last year. We recommend taking 30% of what you think your business will make and then dividing that by 4. This is often better for people whose income varies. In essence, you calculate your tax liability every quarter by projecting your income and deductions for the year. The IRS provides a worksheet to assist with this calculation. 

 

Whichever method you choose, you will still use IRS form 1040-ES to show your income estimate and project your tax liability.  

 

Step 4: How to pay quarterly tax estimates 

 

Now that you know how much you want to pay. The IRS gives you several options for how to submit payment. 

 

• Your online IRS account. Access your online account to conveniently make estimated tax payments and access your payment history and other tax records through IRS.gov/account. 

 

• The U.S. Treasury’s Electronic Federal Tax Payment System: We recommend simplifying the process of paying federal taxes by utilizing EFTPS, the Electronic Federal Tax Payment System. This system enables individuals and businesses to conveniently make all their federal tax payments, estimated tax payments, and scheduling payments in advance. 

 

• Mail: Payments can be made through the mail along with the form 1040-ES 

 

• • The IRS2Go app
  • IRS Direct Pay 

• By debit or credit (additional fees apply).

• Pay in cash at certain IRS retail partners.

 

Step 5: Seek Professional Assistance if Necessary:

If you’re uncertain about how to calculate your quarterly tax estimates or need assistance with tax planning, consider consulting with a qualified tax professional or accountant for guidance.When is comes to calculating your quarterly tax estimates or needing assistance with tax planning, it is recommended to consult with a qualified tax professional or accountant for expert advice. 

 

By following these steps and staying organized with your quarterly tax estimates, you can fulfill your tax obligations efficiently and avoid penalties while maintaining control over your finances as a self-employed individual or business owner.