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How Estimated Quarterly Taxes Work

Choose FI has partnered with CardRatings for our coverage of credit card products. Choose FI and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities. Disclosures.

If you’re taking on a side hustle or you’ve launched your own business in your post-retirement life, you may have little experience in handling your own estimated taxes.

While almost everyone is required to file a tax return by April 15th, the self-employed will have some regular tax bills throughout the year.

The basic rule of thumb is that if you think you will owe more than $1,000 in taxes this year you should pay estimated quarterly taxes.

Regardless of the type of work you do, if you have any form of self-employment of income–you’ll likely need to think through and pay estimated quarterly taxes to ensure you’re golden along the way.

With traditional employment, your taxes are automatically withheld from your check and you are given a W-2 at end of the year. If you work for yourself none of your taxes will be withheld. Therefore, you will likely need to send in quarterly payments.

Here are some quick tips on quarterly taxes for the self-employed.

How Do You Know If You Owe Estimated Quarterly Taxes?

If you’re taking on part-time work with Uber, Airbnb, or even as a contractor for a local business, you will need to be aware of your estimated earnings. You will use this information to determine what your tax liability will be.

Income taxes come in three forms.

  • Social Security Taxes
  • Medicare Taxes
  • Income Taxes

Social Security and Medicare taxes equal 12.4% of your profits. When you are traditionally employed your employer pays half of these taxes on your behalf. But when you are self-employed you have to pay the whole thing yourself. This is what is often referred to as “self-employment tax.”

Your income taxes are based on your income. Note this is the profit from your business plus any income from any other sources, such as from your job or short-term investments.

You can use a tax calculator such as this one to help determine your liability.

If you’re anticipating you’ll owe more than $1,000 in taxes–you will need to pay quarterly. You’ll need to do some math to split up what you estimate you’ll owe into four quarterly payments.

Keep in mind, if you have a traditional W-2 job taxes are being taken from your paycheck. Those taxes are being submitted on your behalf and count towards your overall tax bill. That will come into play when doing these calculations.

Let’s say you figure your entire tax bill will be $12,000 for this year and you are having $10,000 in taxes withheld from your paycheck. That means you are short $2,000. Your estimated quarterly taxes will be $500.

If you aren’t feeling confident in your calculations, any tax professional will be able to help you figure out exactly what you should pay in quarterly taxes. Don’t be afraid to ask.

Of course, you’ll also want to do some research to ensure you understand what is expected of you as state tax laws vary in each state.

What Happens If You Earn More Or Less Than You Anticipated?

If you anticipate your income will match last year’s, just divide last year’s tax bill by four. Then follow the due dates we’ve outlined below to pay your taxes on time without penalties. If you experience a change in income outside of your side-hustle or self-employment work, you’ll want to take those into consideration as well.

For instance, if you file jointly, and your spouse is finally able to leave his full-time work due to your FI lifestyle, you’ll want to adjust accordingly. By filing jointly, their income–for better or worse, impacts your estimated quarterly payments.

If at the end of the year, when you file your taxes you find that you’ve overpaid you will get a refund. If you find that you’ve underpaid you will owe the additional taxes. If you underpaid this year, simply adjust for next year.

Related: Best Places To Get Your Taxes Done

How To Estimate Taxes After Changes In Income

If you have some challenging factors that impact your estimated taxes, or life circumstances change beyond your predictions, you can also calculate how much to pay by utilizing form 1040-ES. This IRS form helps you calculate your estimated taxes based on your expected adjusted gross income for the year. If you want something a little more hands-off, check out this quarterly tax calculator.

If your income fluctuates, you may want to just make your estimations quarterly, rather than once per year. If you take this approach, your estimated payments will fluctuate from one quarter to the next, based on your actual income. This will ensure that your payments to the IRS are reflecting your actual circumstances, not an outdated estimate.

When Are Quarterly Taxes Due?

As nice as it would be to set your own due dates for quarterly taxes, Uncle Sam sets the deadlines for estimated taxes:

For January 1st through March 31st: Payment is due by April 15th
For April 1st through May 31st: Payment is due by June 15th
For June 1st through August 21st: Payment is due by September 15th
For September 1st through December 31st: Payment is due by January 15th of the next calendar year

You can submit your quarterly federal taxes online or over the phone with a direct bank transfer, credit card, or debit card. (Watch for fees if you use a debit or credit card.)  You can also send in a payment by mail with the payment voucher from Form 1040-ES. For your state taxes owed, be sure you familiarize yourself on when and how payments can be collected.

Some states have no income tax, but if you have questions, call your accountant to be sure. You don’t want to be stuck on the due date if you’re not sure what to do!

Related: Chase Ink Business Cards: Don’t Leave $2,250 On The Table

What Happens If You Don’t Pay Quarterly?

It can be overwhelming for a new freelancer to estimate their first-year earnings to accurately estimate what they’ll owe. While you can pay your taxes in a lump sum at tax time, you may be hit with penalties for not paying quarterly.

Fortunately, if your business is still small and growing, you will likely owe around one-half percent of your tax bill for each month you haven’t paid quarterly. If you’re freaking out about not getting your estimations just right, it’s better to try and miss the mark than to not pay at all. No need to give the government even a cent more than you need to in penalties on your earnings!

New contract workers or business owners often make the mistake of thinking they can just pay taxes in a lump sum at the end of the year. However, keep in mind that penalties will be imposed on quarterly taxes that weren’t paid when you technically owed them.

While it can be a bit stressful to sit down and try to hit the mark on what you’ll be pulling in for the year, especially if you’re new. Set a stretch goal that’s realistic and work towards it. Not only will this help hold you accountable to grow your business, but you’ll save yourself from getting hit with any fees.

If you end up overpaying your estimated taxes, you will get a refund at the end of the year. While it’s not fun to give the government an interest-free loan, it is better than owing them a large lump sum!

Related: 11 Things To Do When Starting A Business

So, DIY Your Quarterly Taxes Or Hire A Professional?

This is entirely up to you. If you’re launching a brand new side hustle and find that with kids, travel, a full-time job, or other obligations, you’re barely running the business itself–much less being able to remember quarterly tax deadlines, it might be wise to hire some help.

Hiring an accountant can be absolutely helpful to you get in the rhythm of a new business. After a year or two, you can get a better grasp on not only how the business is doing. Set up your own reminders and tracking documents to ensure you’re accountable.

No matter what path you choose, don’t forget to pay your quarterly taxes!

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How Estimated Quarterly Taxes Work

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Choose FI has partnered with CardRatings for our coverage of credit card products. Choose FI and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities. Disclosures.
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