For everyone who has a business or makes a life as a freelancer, it will be needed for you to make an estimated tax payment every quarter. It is a must to be done if you do not want to get penalties and interest. If you are not familiar with the quarterly payments, keep reading the post to be informed about it.
Who are the ones who have to pay quarterly taxes? In general, the ones who have to pay the quarterly estimated tax payments are the ones that do not have withholding tax taken out on their income. The ones who are subject to income tax withholding are mostly those who are salaried and get a W2. Usually, they do not have to make estimated tax payments.
Quarterly estimated tax payments are the common things for the self employed. However, there are some other income sources that may need estimated payments. These other income sources include substantial investment income, significant retirement income, alimony income, income distributions from a partnership or Subchapter S Corporation, and you receive a large income windfall, such as from the sale of a major asset.
Why do you need to pay quarterly taxes? Usually, the income that is received from almost every source is subject to income tax. It is not limited to federal income tax only. In fact, it also includes state income tax and Social Security and Medicare tax.
You are required to pay most of your tax liability before the tax due date. Even though it is automatically accomplished through regular withholding, it needs to be done through quarterly estimated tax payments where withholding is not available.
Every year, the quarterly estimated tax payments are due four times. Here is the list of the payment due dates:
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- April 15: It is for January, February, and March.
- June 15: It is for April and May.
- September 15: It is for June, July, and August.
- January 15 of the following year: It is for September, October, November, and December.
For those with an overpayment from the previous tax year, you are able to pay for your estimated taxes.
For instance, if you are required to make quarterly payments of $4,000 each but you have a $3,000 over payment from the previous year, you have a chance to have the refund applied to your first tax estimate. The statement means your first tax estimate, due on April 15th, will be cut to just $1,000.
The chance to have an overpayment applied to more than one estimate is high. For instance, if you have an overpayment for the previous year of about $10,000, you are allowed to apply that to the first two estimates. The first one is at $4,000 each and the rest $2,000 to the third estimate.
On top of that, you can also have the overpayment equally distributed across every of four estimates. Apparently, an overpayment of $4,000 is able to cut each of the four payments by $1,000.
Then, how do you pay quarterly taxes? If you want to pay quarterly taxes, there are a few methods to pay quarterly taxes to choose from, as follows:
Method 1: Divide your tax liability by four
You can determine the quarterly estimated tax payments when you file your tax return for the previous year. In general, your tax liability for the previous year will be divided by four and your estimated payments for each quarter will be the net result. Usually, this kind of thing is done by either a professional tax preparer or a tax preparation software plan.
It is not easy to figure out your own quarterly payments. If you do not believe it, you can check out the IRS form here: https://www.irs.gov/pub/irs-pdf/f1040es.pdf.
Method 2: Pay online
If you find the first method above hard and a bit complicated, you might want to use the second method instead, which is by using IRs Direct Pay. This one is an online payment method that is provided by the IRS. You will not get charged if you pay from your bank account. As for those who pay by credit card, you will be referred by the IRS to an approved payment system. Before using this method, you should be aware that it is not free and you will be charged. If you are wondering how much it costs for you to pay quarterly taxes by using this method, it is stated that it can range from a flat fee of $2.59 per payment to up to 2% of the amount paid. If you have a bank account and there is enough money in it, it is better for you to pay through it as you do not have to spend any.
Method 3: Form 1040-ES
It is clearly not easy to pay quarterly taxes. If you are not sure about the thing that you have to do, you are suggested to contact a tax preparer. Aside from that, you can also use tax software. If you want to use this method, you can find the guide on Form 1040-ES.
Paying quarterly taxes is a must and it is important. If you do not pay them, there are two main outcomes. The first one is you will have a large tax liability when you file your taxes. For instance, you collected $60,000 from your job but you also had an additional $30,000 in income from investments. In this kind of case, you may have had sufficient tax withheld from your employment income. However, it is different from your investment income. It is possible for the investment income to result in an additional tax liability of something like $7,000. The second one is you will have to pay interest and penalties on the underpaid tax liability. Even if you have the ability to pay the extra tax due, it might be needed for you to pay interest and penalties. If you fail to pay the full amount of your tax liability by the filing deadline, there might be a penalty of 1,5% per month on the unpaid balance.
AUTHOR BIO
On my daily job, I am a software engineer, programmer & computer technician. My passion is assembling PC hardware, studying Operating System and all things related to computers technology. I also love to make short films for YouTube as a producer. More at about me…
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