Salary workers who receive a regular monthly salary don’t have the responsibility of filing taxes or covering federal tax liabilities like income tax, Social Security, and Medicare. Their employer withholds taxes from the paycheck and matches them before they even hit their bank accounts. What if you are self-employed or a gig worker? Are you still required to pay taxes? Here are the details about quarterly taxes, how they are paid, and what to do when you file your tax returns.
Why are quarterly tax payments necessary?
Uncle Sam uses a pay-as-you-go tax system. It means that if your income is not subject to withholdings, such as freelancing or stipends, you will need to pay your tax bill over the entire year. However, instead of spending it one time in the end, you’ll have to pay it all in installments. It is called quarterly because the tax is paid in four quarterly installments. These payments are dependent on your self-employment adjusted gross income and your tax return for the year.
It can be challenging to find time to do tax work, especially when you have to pay four times per year. However, reducing the tax burden if you plan your quarterly payments correctly and timely. Then, you will be able to pay the entire tax bill by the deadline.
Who is responsible for quarterly taxes?
According to the Internal Revenue Service, self-employed individuals who anticipate having a tax liability of $1,000 or more and whose income is not automatically withheld must pay quarterly taxes. These are the prime candidates:
- Freelancers
- Sole proprietors
- Independent contractors
- Owners of small businesses
- Shareholders in S corporations
You can also include earnings from these sources:
- Dividends
- Alimony
- Interests
- Investments
- Rent income
- Capital gains
- Awards and prizes
Anyone with a substantial taxable income who earns money from any of the sources mentioned above must manage their books. It will allow them to determine how much they owe based on their business earnings. You’ll be refunded if you end up paying more than you owe by the end of the year.
Underpayment can lead to an IRS penalty. To see if there is a penalty for underpayment, please refer to Form 2210. For more information on who quarterly taxes apply, please read Form 1040-ES for individuals and Form 1120W for corporations.
Who doesn’t have to pay quarterly taxes
If you are paid a monthly wage and salary, you can avoid paying quarterly taxes. It can be done by submitting Form W-4 to your employer, asking them for a more significant percentage of your salary to pay quarterly taxes on your behalf. You will find a line on the W-4 form asking you to specify the amount you would like your employer to withhold.
If you meet these conditions, you will generally be exempted from quarterly taxes.
- Your return should be less than $1,000.
- For the previous year (2020), you had no tax liabilities
- You were a U.S. citizen for the entire year (2021).
- Your previous tax year was for 12 months (2021).
How to avoid being penalized
It is essential to be as exact as possible when calculating your quarterly taxes to avoid underpayment penalties. The IRS provides a safe harbor method to help you estimate your tax liability, particularly if you have irregular income. Use one of these safe harbors to avoid underpayment penalties.
- Calculate how much you owe this year (2021), and pay 90% in four installments.
- You must pay 100% of your tax liability for the preceding year (2021).
- If your adjusted gross income exceeds $150,000 for married couples or $75,000 for singles, you will be charged 110%
When is quarterly tax due?
You have the choice to make one estimated tax payment or four quarterly payments to the IRS. The quarterly taxes are due in April, June, and September. The first quarter covers three months, from January 1 through March 31, while the second quarter covers one quarter, from April 1 through May 31. The third-quarter payment covers the fourth quarter (from July 1 to August 31) and the final four months of the calendar year (September 1, December 31, and the 4th of October).
How do I pay my quarterly taxes?
Once you understand the basics of quarterly taxes, you can set up an IRS payment plan. The IRS offers an electronic system that makes it easy to pay quarterly taxes. You have the option to pay using any of these options:
Online payment
The IRS will provide you with a payment method that they approve. Paying by Credit Card usually incurs $2.59 per payment or 2% of the total amount. You can also use IRS Direct Pay, which is much easier and costs no fees.
Pay by phone
Enroll in the Electronic Federal Tax Payment System to make the payment free of charge
Pay by app
IRS2Go is an official mobile app from the IRS. This app allows you to make payments, get tax help, and check your status regarding taxable income.
Cash payment
You can also pay old-fashioned by visiting your local Taxpayer Assistance Center. You can also check out IRS Form 1040-ES.
Plan your tax management
It can be challenging to calculate what you owe, pay taxes four times per year, and do it if you are self-employed. However, whether you are a sole proprietor or freelancer, it is essential to learn and master your quarterly taxes to keep your business financially sound throughout the year. It is a good idea to keep track of your calendars, organize your documents, create a financial plan, and pay taxes on time.
Disclaimer. The opinions and views expressed in this article are the authors Shalom Lamm.
