For those who pay quarterly taxes—or those who don't, but think they should—knowing who pays and when estimated taxes are due may help you throughout the year.
TABLE OF CONTENTS
The U.S. uses a pay-as-you-go tax system. This means that you usually need to pay most or all your tax bill during the year as you receive income. Waiting until the end of the year or when you file your taxes to pay what you owe can lead to penalties and interest charges from the IRS.
If you work as an employee, your employer likely withholds income tax for you and sends it to the IRS. If you’re self-employed, you likely need to make quarterly estimated tax payments.
Missing estimated quarterly tax payment deadlines may result in penalties and interest.
If you don't have any or enough taxes withheld from your pay and expect to owe $1,000 or more, you usually need to pay quarterly estimated taxes.
Generally, if you’re self-employed, you need to make quarterly tax payments. This is unless taxes are withheld from another source.
If you're an employee, you get a Form W-2 from your employer each year. If this is your only income, you likely don’t need to worry about making quarterly tax payments as long as enough tax is withheld from your paycheck.
But if you’ve earned taxable income from sources like these below, you may need to make quarterly tax payments:
Additionally, you may need to make estimated tax payments because you work as an independent contractor on the side of your regular employment. Alternatively, you can increase your withholding by filing an adjusted W-4 through your employer. This way, you account for the extra tax you might owe from the added income that you make from your side gig.
Typically, if you expect to owe $1,000 or more in taxes for the year, beyond the amount withheld from your income, you should pay estimated quarterly taxes.
The amount of estimated tax you need to pay mostly depends on your prior year income and credits. You may need to pay as little as 100 percent of last year’s tax liability but as high as 110 percent.
The amount of estimated tax you need to pay depends on your adjusted gross income.
If your last year's Adjusted Gross Income was $150,000 or less ($75,000 or less if married filing separately), then you can avoid a penalty if you pay either 90 percent of the current year's tax or 100 percent of last year's tax.
You can pay the amount of last year's tax in four quarterly payments. This rule helps if you have a big spike in income one year. For example, because you sell an investment for a huge gain or win the lottery.
If you withheld enough tax from your wages for the current year to cover 100% of the prior year’s tax (110% if your income exceeds certain amounts), then you wouldn't need to pay estimated taxes. This applies no matter how much extra tax you owe on your windfall.
If your last year's Adjusted Gross Income was over $150,000 ($75,000 if married filing separately), then you're required to pay either 90 percent of the current year's income tax, or 110 percent of last year's tax.
Note: If you're a farmer or a fisherman, refer to IRS Publication 225: Farmer's Tax Guide. It explains special rules that apply to your situation.
Now we know more about quarterly estimated taxes, who has to pay them, and how they work. Next, we will address some myths about them. There’s a lot of misinformation and misconceptions around estimated quarterly taxes. Exposing these myths can help you avoid costly penalties for underpayment of your estimated tax.
Myth 1: You can pay your taxes in a lump sum at the end of the year
Taxpayers often have a serious misconception. They think they can pay their taxes in one lump sum at the end of the year. It's a mistake to think the IRS is OK with a single end-of-year payment.
Myth 2: Missing a estimated quarterly taxes payment deadline is fine as long as you pay on the next deadline
If you have to make estimated tax payments, following the schedule is important.
Missing quarterly deadlines, even by one day, can mean accruing penalties and interest. If you miss a payment deadline, your best bet is to send your payment as soon as you can.
You can also appeal IRS penalties. The IRS would rather collect taxes than penalties. So, it might forgive the penalties you incur.
Myth 3: You don’t need to report tip income
Tips are taxable just like wages. Tips can include cash left by customers. They can also include amounts from debit or credit card purchases. Your employer or other employees may give out pooled tips.
However you receive your tip income, you need to report them to your employer if they exceed $20 per month. You can keep a daily record of tips with Form 4070. Receiving tip income can cause you to owe tax on more income than what is on your W-2. You may need to make estimated tax payments depending on how much tip income you have.
Myth 4: Your taxes are the same whether you’re employed by someone else or self-employed
As an employee, your employer typically pays half of the employment taxes on income you earn during the year. This means they pay half of your Social Security and Medicare taxes. You pay the other half through tax withholding from each paycheck.
If you're self-employed, you need to pay both halves of the self-employment tax. This is because you're both the employee and employer. The good news is that you can deduct half of the amount you pay in self-employment tax from your income when calculating your income tax. You can do this on your Form 1040. For example, $3,000 in self-employment tax reduces your taxable income by $1,500. In the 22% tax bracket, that would mean an income tax savings of $330.
Myth 5: You don’t owe taxes on side hustles
The IRS requires you to pay taxes on all income sources unless they’re excluded. Earning money outside of a formal job where you receive a W-2 isn’t typically one of those excluded income sources.
If you earn money from a side hustle or working as an independent contractor, you might need to pay quarterly estimated taxes on this income. This income should be reported to you on a Form 1099-NEC after the tax year. You will use this information to prepare your Form 1040 tax return. You need to prepare a Form W-9 to report your personal information to any company you performed services for or that you sold products for on their behalf.
Myth 6: You don’t need to pay taxes if your clients don’t provide you with a 1099
If you earned under $600 from a client in the tax year, your clients typically aren’t required to give you a Form 1099-NEC.
This doesn’t mean you don’t have to report this income on your tax return. If you're a freelancer or work as an independent contractor, you still need to report this income on Schedule C of your Form 1040.
You can track this income by using accounting software for all your income and expenses.
Myth 7: If you have income reported on Form 1099-NEC, the IRS may not have received a copy and therefore you don’t need to pay tax on it
Some people believe that if they receive a Form 1099, it does not necessarily mean the IRS received a copy. That scenario, however, is highly unlikely. If you received a 1099, the IRS most likely received one, as well.
Myth 8: If you overpay your estimated taxes, you forfeit this money
When you pay your estimated taxes and this results in overpaying your taxes for the year, this money isn’t lost. Instead, you have two options for how to handle this overpayment:
The IRS has set four due dates for paying estimated taxes. They are spread throughout the year. Typically, the due date is the 15th for each of the months in which payments need to be made. If the 15th falls on a weekend or a federal holiday, however, the due date is moved to the following business day.
The IRS refers to these as quarterly taxes, but the due dates don’t necessarily fall within “quarters.”
You should submit your quarterly tax payments according to the following IRS quarterly estimated tax timeline:
A payment not postmarked on or before the due date will be considered late and you will likely be penalized.
If you owe more than $1,000, the IRS wants you to make payments throughout the year as you go. If you fail to pay enough income taxes through withholding or estimated taxes, you may face a penalty and interest for underpayment.
Also, you may be charged a penalty if your estimated tax payments are late. This is true even if you should get a refund when you file your tax return.
It’s best to pay your taxes on time throughout the year according to the estimated tax payment schedule.
If you work as a farmer or fisherman or qualify as a certain higher income taxpayer, there are special rules for estimated tax payments. If at least two-thirds of your gross income for 2022 or 2023 is from farming or fishing, you only need to pay 66.6 percent of the tax reflected on your 2023 return to avoid a penalty. Normally, you would have to pay 90 percent.
To find your estimated tax, estimate your income and deductions for your tax return.
An easy solution to avoid a penalty is to look at your last year’s return. You can use it to find the total tax you paid. Your payments should be 100 or 110 percent of last year’s taxes, depending on your income. Include both estimated tax payments and withholding. This will help to avoid any underpayment penalties.
Also, track the dates and amounts of your payments. This will help you know how much tax you've paid and how much you still owe.
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