If you’re self-employed and turning a profit, chances are you owe quarterly estimated taxes. Navigating this process can be tricky, but knowing what to do ahead of time could save you from costly penalties and interest. Here’s what you need to know.
In general, anyone who does not have withholding tax taken out of their income needs to pay quarterly estimated taxes. Most salaried W-2 employees who work full or part-time and already have taxes withheld don’t usually make estimated payments. In comparison, business owners, freelancers, and self-employed individuals often fall under this category and are required to pay them.
According to the Department of the Treasury Internal Revenue Service:
In most cases, you must pay estimated tax for 2021 if both of the following apply.
1. You expect to owe at least $1,000 in tax for 2021, after subtracting your withholding and refundable credits.
2. You expect your withholding and refundable credits to be less than the smaller of:
a. 90% of the tax to be shown on your 2021 tax return
b. 100% of the tax shown on your 2020 tax return. Your 2020 tax return must cover all 12 months.
Quarterly taxes are just that- taxes you pay each quarter. Payments are due four times a year, and the filing dates are broken up as follows:
Q1: April 15 (January- March)
Q2: June 15 (April- May)
Q3: September 15 (June- August)
Q4: January 15 of the following year (September- December)
According to the U.S. Small Business Administration, “Instead of waiting for the traditional tax season during the months of March and April, it’s in your best interest to pay the government in periodic payments. Since you do not have an employer who manages your taxes, Social Security, and other benefits per a W4 form, you will need to manage your books and determine how much you owe the government based on your business earnings.”
The first step is to complete and file your 1040-ES form. However, this 15-step process can be tedious and often difficult for most. We recommend using either tax software or a professional tax preparer to simplify the process. After you complete your form, here are three steps to take.
Some people put off doing their taxes until it is too late. If you are thinking about going down this route or already have, there are some pretty significant penalties for filing taxes late that you should know about. If you don’t pay your quarterly taxes, here’s what will happen.
Some individuals may be able to avoid the penalty if they meet these qualifications:
Filing your taxes can be a complicated and stressful process, especially if you are self-employed. We’re here to help simplify it! At Sheffield, Trackwell, and Rapp, we have licensed CPAs ready to assist you with your quarterly taxes. Contact us today and find out how we can help you.
STRCPA is available during this tax season to meet your needs. We are available via phone or email. Contact us