How To Calculate and Pay Quarterly Estimated Taxes
What are quarterly estimated taxes?
Quarterly taxes are paid four times a year by people who are self-employed or earn independent income, also known as 1099 income. When you freelance or become a contractor, you’re essentially becoming a business-of-one. Just like how companies withhold and pay FICA taxes (to contribute to Social Security and Medicare) for each employee, contractors pay their share as well through SECA taxes.
Who pays quarterly taxes?
Anyone who is a 1099 contractor, independent contractor, freelancer or self-employed. This often includes uber drivers, construction workers, yoga instructors, actors, lawyers, and many more professions. There are some specific regulations for this, but generally you have to pay quarterly taxes if you expect to owe $1,000 or more in taxes for the year (or roughly, if you plan to make more than $3,000 in 1099 income). If you earn more than $600 from a gig or project, a company will typically send you a 1099-MISC before January 31st. Even if you don’t receive a 1099 form, you’ll still need to track and pay quarterly taxes if you plan on earning $3,000 or more.
What do you need to track in order to pay?
You’ll need to diligently track and collect earnings (in the form of paystubs, or invoices) and business type (if you do different types of labor). In order to lower how much you owe, it’s important to also track expenses. Common expenses include anything that is “ordinary and necessary for your business.” Common examples include:
Mileage
Home office expenses
Meals with clients
Supplies
Software for business: Adobe, Microsoft Office
As a safe rule of thumb, put aside 30% of each paycheck so you’ll be able to afford quarterly taxes when the time comes. By smartly tracking deductions, you can whittle down that percentage when time comes to pay and retain more of that 30% you put aside.
How do you pay?
Here are the forms you’ll need in order to calculate and file your quarterly taxes:
1099: The company(ies) you worked for will summarize the total amount they paid you on a 1099 at the end of the year.
Schedule C: You record your 1099 income plus any related expenses (which returns your business profit, i.e. earnings – expenses = profit). This profit is then subject to both self-employment taxes and federal and state income tax.
1040-ES: The worksheet for calculating quarterly taxes
1040 and Schedule SE: Where you calculate and record year-end income taxes and self-employed taxes
How do I submit my payment?
You have two ways to send in your payment:
1. Electronically: Payment must be submitted by 8pm Eastern then day before the due date, via a system called EFTPS.gov. You can access the direct pay here.
2. Snail mail: Postmark the payment on or before the due date. First, print and fill out a 1040-ES form for the corresponding quarter (for Sept. 15th that would be the Q3 Voucher). Then write a check to the United States Treasury for however much you owe. Finally send it to your nearest IRS mail center.
What happens if you don’t pay?
If you don’t pay quarterly when you should, you could face a penalty: typically, you’ll pay a 6-8% penalty on the amount you underpaid. So if you made $10,000, owe $2,000 in taxes, and didn’t pay quarterly taxes, you might be subject to a penalty of 6% of the $2,000 underpayment, which is $120 — yikes!
