Quarterly Tax Tips for Freelancers, Consultants and Home Business Owners
Wage earners pay taxes throughout the year, and the IRS expects self-employed individuals to do the same. Learn how to deal with estimated tax payments.
Who Pays Estimated Tax?
Independent contractors or sole proprietors of businesses must pay estimated taxes. Members of trade or business partnerships also pay quarterly taxes, as do people who make money from investments or similar revenue streams.
Estimated Tax and Self-Employment Tax
Estimated tax, as the name implies, refers to the amount of tax you calculate you'll have to pay over the tax year, paid in four installments.
In addition to regular tax, self-employed individuals pay self-employment tax. Self-employment tax refers to Social Security and Medicare tax similar in amount to tax withheld from wage earners.
Four times a year self-employed individuals fill out a 1040-ES (Estimated Tax for Individuals) and submit the form with payment to the IRS. Tax software helps you calculate your estimated earnings.
Can't I Wait to Pay Until Tax Time?
Not a good idea. The IRS likes to get its tax payments throughout the year from both wage earners and the self-employed. You must pay estimated tax on time if both the following conditions apply:
- You expect to owe at least $1,000 in taxes for the year after subtracting withholding and refundable credits.
- You expect your withholding or refundable credits will be less than 90 percent of the taxes estimated for the current year's tax return or less than 100 percent of the tax shown on last year's tax return (the smaller of these two amounts applies).
The IRS doesn’t want you to spend their money before you submit your annual tax return. Failing to submit estimated taxes on time can result in penalties if you wind up owing on your annual tax return.
Estimated Tax Deadlines
Estimated tax deadlines are the 15th of April, June, September and January. If the due date falls on a holiday or weekend, payments are due on the next business day and processed based on the payments postmarked dates.
Tips for Paying Estimated Tax
Remember your estimated taxes will change based on your income for each pay period. If your revenues fluctuate during the year you may need to pay estimated taxes on some periods but not on others.
While you can submit your 1040-ES and payment by mail, using the Electronic Federal Tax Payment System is more effective and ensures payments arrive on time.
If your income is relatively stable, consider making monthly payments instead of quarterly. Monthly payments are smaller and more manageable. Track all estimated tax payments for use with your annual tax return.