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When you’re your own boss, hard work pays off, but it also makes you pay– four times a year, in fact– to Uncle Sam in the form of quarterly estimated taxes.
If you’re new to the whole sole-proprietor, or I-work-for-myself thing, don’t worry. We’ve got your answers to the most commonly asked questions about quarterly estimated taxes.
These are essentially Uncle Sam’s share of your earnings, paid in advance, either based on the previous year’s earnings or an estimation of what you think you’ll earn. (Hence the name.)
If you are a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, then you probably don’t have Uncle Sam’s portion of your earnings deducted from your paychecks. That means you should be paying estimated quarterly taxes… otherwise you will owe a big lump sum come tax time (in addition to a possible fine and interest on what you should’ve been paying throughout the year.)
The only self-employed individuals who don’t need to pay estimated taxes are those expected to owe less than $1,000 in taxes. If that’s you, then you can probably stop reading now.
The tax year is divided into four fiscal quarters, with each period spanning a course of three months.
*If any of these dates fall on a Saturday, Sunday, or a legal holiday, then the payment will be considered on time as long as it is received by the next day that is not a Saturday, Sunday, or legal holiday.
Typically, If you’ve been in business for a year or more, a good rule of thumb is to look at what you owed last year and pay the same for the current year. This can be a hit or miss though. If you’ll make more in the current year, the IRS penalizes you for underpaying. If you estimate too high, you’ll get a refund at the end of the year, but you’re basically loaning the IRS money that could be in your pocket during the year.
Googling “quarterly estimated tax” calculators can give you helpful estimation tools to give you a better idea on how much to pay each quarter. Turbotax recommends that if you’ll make about the same amount, in the current year as the previous year, than pay 100% of the previous year’s tax amount. If you estimate making more pay 110% and if you estimate making less than pay 90% of that amount. Again, these are estimates though and can vary if you make significantly MORE or LESS than previous years.
If you’re still clueless, investing in the services of an accountant or knowledgeable bookkeeper will give you peace of mind when it comes to paying quarterly estimated taxes.
Your payments can be made in one of several ways.
That’s fine if you don’t want to pay, but you’ll end up paying more as a result of the financial penalties and fees that the IRS will assess. When it comes to these penalties/fees there’s no set amount that you can calculate ahead of time– it’s all based on your tax return. Whether you pay late, or the suggested method of on time, Uncle Sam will be getting his money from your earnings.