Throughout the year there are certain days that don’t seem to come around fast enough— birthdays, holidays, and vacation days. Then, there are some days that people dread just the thought of, like Tax Day. One Tax Day is stressful enough for taxpayers, but did you know that the self-employed have four tax days every year?
That’s right- four quarterly tax deadlines throughout the year to keep track of. Why? Because the self-employed pay taxes a little differently than employees who work under a direct employer. They don’t pay more, they don’t pay less, they just pay differently, taking more personal responsibility for the process.
Plan Your Quarterly Taxes
Tax planning and compliance are especially important, and sometimes daunting, for the self-employed. Therefore, many taxpayers seek the help of professional tax preparation services, especially the newly self-employed. Waters Hardy works with many clients in this situation, as self-employed clients are learning to navigate a new system. We also guide our current clients who have been self-employed for years but are looking for advice to maximize their tax benefits in smart ways. Whatever your situation, Waters Hardy is your tax prep resource, offering expert advice, professional work, and exceptional service.
Why Quarterly Payments?
The U.S. tax system is a “pay as you earn” system, meaning that taxes are paid to the government as you receive income throughout the year. If you’re employed traditionally, your Social Security and Medicare taxes are split between you and your employer.
Since taxes come out of every paycheck, this means the government is maintaining a steady amount of income throughout the year. If you work for yourself, however, income taxes won’t be withheld from your paycheck automatically. The IRS uses quarterly payments to tax the self-employed all year, ensuring they are still getting what’s due at a steady pace.
Who Pays Quarterly?
Freelancers, independent contractors, and small-business owners who expect to owe at least $1,000 in taxes from their self-employed income all pay quarterly taxes. If you owe less than that, you can just pay your taxes on that income when you file your annual tax return. If you’re not sure if you’ll need to pay quarterly taxes, you should reach out to professional accounting services who can help you with your tax prep. However, if you owe a lot of money and don’t file quarterly, you might have to pay an underpayment penalty in addition to the taxes you owe.
Calculating Estimated Tax Payments
Depending on your income, the tax year, your filing status, and eligible deductions, your quarterly taxes will vary. Additionally, you will still file an annual tax return showing what you actually made, like everyone else. The good news is that your quarterly payments will be estimations of the tax you expect to owe on Tax Day. As a result, getting this amount exactly perfect isn’t crucial.
In fact, the IRS gives quarterly filers a 10% buffer in case they’re slightly off. If you overestimate, you get that extra money back as a tax refund. This is safer than underpaying and being blindsided by a huge tax bill when it’s time to pay up.
Here are some ways that you can reasonably calculate what your estimated quarterly tax payments should be.
- Estimate your taxable income.
- Calculate how much you’ll owe in income and self-employment tax.
- Divide your estimated total tax into quarterly payments.
- Send an estimated quarterly tax payment to the IRS.
- Self-Employment Tax: This tax is generally 15.3% of your self-employed income, and it rolls your share of Medicare and Social Security taxes into one tax. When you’re a salaried employee, your employer will split the cost of those taxes with you. Keep in mind, when you’re in business for yourself, you’re responsible for the whole thing.
- Income Tax: This is the tax you pay on your income, at your income tax rate, just like everyone else.
Experts agree that for the self-employed, setting aside 25–30% of every paycheck for taxes is a smart move. Remember, if you overpay on your quarterly tax payments, you’ll get that extra money back as a tax refund.
When are Estimated Taxes Due?
The 2022 quarterly estimated tax deadlines are:
- 1st Quarter (January 1 – March 31): April 18, 2022
- 2nd Quarter (April 1 – May 31): June 15, 2022
- 3rd Quarter (June 1 – August 31): September 15, 2022
- 4th Quarter (September 1 – December 31): January 17, 2023
If the 15th falls on a weekend or a holiday, then the due date is the next weekday. Notice that the final fourth-quarter payment deadline for your 2022 taxes is in the first month of the new year, January 17, 2023.
How to Pay Estimated Tax
There are several ways that you can go about paying your quarterly taxes. The IRS has set up several payment options, making paying fairly simple and efficient. In fact, most taxes can be paid in about 15 minutes. You can pay online, by phone, IRS application, with cash or check as well.
Quarterly Tax Payment Penalties
Quarterly tax penalties include both a cumulative monthly percentage and a monthly interest rate. As a rule of thumb, it’s about 7% of the taxes you’ll owe at the end of the year. Every month that you delay paying adds to the penalty. If you do miss an estimated payment, you should pay as soon as possible, as those penalty payments add up fast.
Self-employed Tax Summary
Don’t forget that even if you’re self-employed and paying quarterly payments, you still need to file an annual tax return along with everyone else, showing what you actually made during the year.
Also worth mentioning, if your business is going well and you see that your income is going to be higher than you thought it would be, you can always adjust your estimated taxes each quarter. If not, you might end up paying more on tax day if you underestimated during the year. You are better off paying a more accurate estimate and receiving a tax refund, than being hit with an unexpected bill.
Waters Hardy for Your Self-Employed Tax Needs
If you are newly self-employed and feeling the pressure of a new tax routine, or a veteran taxpayer who is ready to turn your tax headache over to professionals, let the experts at Waters Hardy help you. For years, we have been trusted to assist our clients with their tax prep needs so that they feel confident knowing that everything was handled securely, efficiently, and most of all, accurately. Contact us today.
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