Paying estimated quarterly taxes four times per year may seem like a chore. But if you project these quarterly payments correctly, it can actually soften your tax burden; when tax season rolls around, you’ll have already paid your approximate tax liability.
In this guide, we’ll show you how to calculate and pay your federal estimated quarterly taxes, and walk you through an example that clarifies the process.
What are estimated taxes?
If you’re self-employed, you’re generally required to pay your taxes four times a year in “estimated” payments, rather than in one lump sum. The reason it’s called “estimated” is because you’re estimating how much income you’ll make this year, and paying taxes on that amount (income tax, self-employment tax, and any other applicable taxes).
Who needs to pay estimated taxes
Before you head too far down the rabbit hole, it’s worth checking whether you actually need to pay estimated quarterly taxes.
If you intend to file as a sole proprietor, a partnership, S corporation shareholder, and/or a self-employed individual, you’ll generally need to make estimated quarterly tax payments if you will owe taxes of $1,000 or more. Businesses that file as a corporation generally need to make estimated tax payments if they expect to owe $500 or more in tax for the year. If you meet these minimums, then you’ll likely have to file estimated quarterly taxes.
You don’t need to pay estimated taxes if…
You’re an employee If you’re an employee, your employer should be withholding quarterly taxes on your behalf. That being said, sometimes they can get the amounts wrong—fill out Form-W4 and give it to your employer to make sure that they’re deducting the correct amount.
You’re a special case If you meet three very specific conditions below, then you don’t have to pay estimated quarterly taxes:
- You did not owe any taxes in the previous tax year, and did not have to file a tax return
- You were a US citizen or resident for the entire year
- Your tax year was 12 months long
If you don’t meet the any of the criteria for non-payment above, then you’re one of the many Americans who needs to pay estimated quarterly taxes—read on!
When to pay estimated quarterly taxes
As the name implies, estimated quarterly tax payments are due four times per year—in April, June, September, and January.
Here are the estimated quarterly tax deadlines.
- For the period Jan 1 to March 31: April 15
- For the period April 1 to May 31: June 17
- For the period June 1 to August 31: September 16
- For the period September 1 to December 31: January 15 of the following year
It’s a good idea to set these dates in your calendar at the start of every tax year.
How to calculate estimated quarterly taxes
Unfortunately, knowing if you have to pay estimated quarterly taxes is the easy part. The hard part is calculating how much you actually owe each quarter.
To calculate your estimated quarterly tax payments, first estimate your expected adjusted gross income, taxable income, deductions, and credits for the year. One way to do this is to use your income, deductions, and credits from last year as a guide.
Once you have estimated these figures, it’s a simple matter of applying a few, simple calculations to figure out how much you’ll owe in your estimated quarterly tax payments. If you need a little more guidance, the IRS’ Estimated Tax Worksheet found in Form 1040-ES for individuals or Form 1120-W for corporations, will guide you through these calculations in detail.
Putting it into practice
To make the process clear, here’s an example of how Stephanie, a sole proprietor, would calculate her estimated quarterly tax payments, based on her income tax and self-employment tax owed.
Step 1: Estimate taxable income for the year
Let’s start with Stephanie’s income tax. In order to estimate how much income tax she will have to pay for the year, Stephanie estimates her income for the year (let’s say she expects to make 90K this year). She then subtracts any above-the-line deductions she thinks she’ll incur for the year.
$90,000 (estimated income) minus $15,000 (above-the-line deductions) = $75,000. This new number is Stephanie’s “adjusted gross income.”
Then, she subtracts the standard deduction for single tax payers in 2018, which is $12,000.
So her total estimated taxable income is $63,000.
Step 2: Calculate income tax
Next, Stephanie multiplies her adjusted gross income by her income tax rate (according to the 2018 tax bracket). Tax brackets change each year, so be sure to consult the most recent numbers.
Based on Stephanie’s tax bracket, her estimated income taxes owed for the year works out to $9,799.50.
Step 3: Calculate self-employment tax
Because Stephanie earned more than $400 this year, she will also have to pay self-employment tax. To calculate self-employment tax, she first has to multiply her estimated total income ($90,000) by 92.35%—this is effectively her self-employment taxable income. She then multiplies this number by 15.3%, the self-employment tax rate. Where does the 15.3% come from? It’s the combination of Social Security tax (12.4%) and Medicare (2.9%). Together, they make up the 15.3% “self-employment tax” figure.
So Stephanie’s self-employment tax total is $90,000 x 92.35% x 15.3%, which works out to $12,716.59.
Which brings Stephanie’s estimated quarterly taxes total to: $9,799.50 (estimated income tax owed) + $12,716.59 (estimated self-employment taxes) = $22,516.09
Step 4: Add it all together, and divide by four.
Now, the final step. To calculate her estimated quarterly tax payments for each quarter, Stephanie simply adds together her income tax and her self-employment tax for the year and divides this number by four. Voila.
$9,799.50 + $12,716.59 = $22,516.09 (Stephanie’s total estimated taxes).
$22,516.09/4 = $5,629.02 (Stephanie’s quarterly tax payment).
If you filed your previous year’s taxes with the help of a CPA, they should also be able to send you estimates for this year’s payments. And if you’re paying estimated quarterly taxes for the first time, it can’t hurt to run your numbers by a CPA before submitting.
How to pay estimated quarterly taxes
Once you’ve got the rest of this down, submitting your payment to the IRS is a breeze: just fill out form 1040-ES and mail it along with a check to the IRS office closest to you.
Alternatively, you can pay online or by phone via the IRS Payments Gateway.
For corporations, payments must be filed through the Electronic Federal Tax Payment System.
The pain of penalties
The IRS may impose penalties on quarterly tax payments for a few reasons:
- Not paying on time
- Not paying enough estimated tax for the year
- Paying too much estimated tax
There are a couple of things you can do to avoid these penalties: pay either at least 90% of what you owe in taxes this year, or pay the same amount (100%) as the taxes you owed last year, whichever is smaller.
Paying 100% of the taxes you owed in the previous year is sometimes referred to as the safe harbor rule. Even if your income grew this year, you will avoid penalties if you match the payments that you owed in the previous year (but you will still have to make up the additional tax payments).
One important caveat—if your income is more than $150,000 per year, then you’re required to pay 110% of what you paid in taxes last year.
Paying taxes four times a year won’t be the most fun thing you’ll do as an entrepreneur, but proper preparation, organized small business recordkeeping, and tax-ready books can help make it one of the most painless tasks.
Note: This guide only covers federal taxes. If you live in a state that charges income tax, you may also need to set up quarterly state tax payments.
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