How to Calculate Your Self-Employed Quarterly Tax Obligation
If you work as an independent contractor, run your business as a sole proprietor, are a member of a business partnership, or your income isn’t subject to tax withholding, you will most likely need to pay estimated quarterly taxes. This amount includes your self-employment taxes (Social Security and Medicare) as well as income tax on profits your business makes.
There are electronic and paper forms available from the IRS that help you calculate your business's payments. However, because self-employment income can be unpredictable and may change dramatically at different points in the year, hiring a tax professional to calculate the amounts for you can be the easiest way to stay in control of your quarterly payments.
How Do I Calculate My Estimated Taxes?
Small business owners use IRS Form 1040-ES to calculate their estimated tax payments. There are three steps involved in this calculation, which take into account your taxable income, your marital status, and any applicable credits and deductions.
To calculate your quarterly tax payments:
1. Calculate Taxable Income
Before anything else, you need to figure out how much you expect to make in one year. This can be based on the full amount you expect to make or the exact amount you make each quarter.
Depending on your situation, you may want to take the following considerations into account:
For small business owners with a steady and reliable annual income, calculating your estimated payments is fairly straightforward, and making quarterly payments makes the most sense to avoid a large lump sum at the end of the year.
For freelancers or businesses with an unpredictable cash flow, it can be more beneficial to tally your income at the end of each quarter and pay taxes on that exact amount. This will avoid any penalties for underestimating your taxable income, especially if you expect your business to grow.
After calculating your gross income, subtract any deductions you are eligible to claim to arrive at your Adjusted Gross Income (AGI).
2. Take Taxes into Account
When you have calculated your AGI, you need to account for income tax and self-employment taxes.
Income tax. To calculate your income tax, multiply your AGI by your tax rate (AGI x Tax Rate). Be sure to check your income tax bracket rate because it changes every year.
Self-employment taxes. Everyone who makes more than $400 per year must also pay self-employment taxes. These include Medicare and Social Security contributions. To find the amount of self-employment taxes due:
Multiply your estimated total income by 92.35% to calculate your taxable income in relation to the self-employment tax.
Then, multiply this result by 15.3% to find the amount you need to pay.
3. Total and Divide
With the total you now have, it's possible to calculate your quarterly payments by dividing the annual amounts by four. This step isn't necessary if you calculate the exact amount of tax due each quarter.
Use these two equations to calculate your quarterly bill:
Income Taxes Owed + Self-Employment Taxes Owed = Total Estimated Taxes
Total Estimated Taxes/4 = Quarterly Tax Payment
When Do I Need to Pay Estimated Taxes?
If you are a business owner or freelancer and receive tax forms other than a W-2, you must make tax payments to the IRS four times per year on income not subject to withholding. Installments for estimated tax payments are due on April 15, June 15, and September 15 of the same year, and January 15 of the following year. Taxpayers must prepare and submit their paperwork (along with payment) before these dates to avoid penalties.
Which Sources of Income Must Be Declared?
Estimated taxes apply to various types of taxable income including:
Interest
Stock dividends
Capital gains
Any income you earn through self-employment
Some individuals may also be liable for making estimated tax payments if they are salaried employees but the amount withheld doesn't cover their tax liability. The money withheld on your paycheck will depend on the information you provided on the W-4 form; if you underestimated this amount, you may have to make estimated tax payments.
If you are a new business owner, you must become familiar with your tax requirements or hire an accountant to take care of your taxes for you. Misunderstanding your tax burden will inevitably end up in IRS penalties and fees against your business, which is why hiring a tax professional is generally a good idea.
Who Should Pay Quarterly Estimated Taxes?
There are some rules of thumb the IRS uses to determine when a business needs to make quarterly income tax payments. Your business is likely to have to pay quarterly taxes if:
It's likely that you will owe more than $1,000 after deducting withholding and tax credits.
You expect your withholding and tax credits to be less than:
90% of your estimated tax liability for this tax year
100% of the previous year's tax liability
There are other rules that affect these requirements, for example:
The 100% requirement increases to 110% if your gross income is higher than $150,000. If you're married and file your taxes separately, the threshold is $75,000.
Farmers or fishermen who gain two-thirds of their income from farming or fishing are subject to different rules regarding estimated quarterly taxes.
Are There Different Ways to Pay Quarterly Taxes?
Many of the businesses we see in our Jacksonville, Florida office (as well as our other locations) find it more manageable to pay their tax bills in weekly, bi-weekly, or monthly installments in order to reach the total amount owed by the end of the quarter. Some businesses find that making regular payments helps them to avoid underestimating their quarterly estimated tax payments.
In addition to different frequencies of payment, you can also submit your paperwork and pay your estimated taxes in a range of different ways. Taxpayers can send their Form 1040-ES and pay their tax bills:
By mail
By phone
Using the IRS2Go app
Through your online account, where you can keep track of your payment history and tax records
File Quarterly Taxes Correctly With the Help of An Expert
Business owners who are required to pay estimated taxes often find that getting the help of a small business tax professional helps them to avoid penalties for underpayment and takes away the element of surprise when it comes to filing their tax returns.
Hiring an accounting professional to file quarterly tax payments for you also frees up more of your time to focus on your business, and—in the case of contractors and freelancers—can provide insights into your financial health to help you make good business decisions in the future.
