If you work for yourself, the words “quarterly taxes” and “estimated payments” probably send shivers down your spine. To make estimated payments more accessible, we’ve created the ultimate guide to quarterly taxes.
What are Quarterly Taxes? And when do quarterly taxes have to be paid?
Quarterly taxes are estimated tax payments made to the IRS throughout the fiscal year (instead of all at once on Tax Day in April). These payments are based on an estimate of your current year’s income. Most people use the previous year’s taxes as a guide when estimating their income.
Taxation is a legal requirement for everyone. If you are self-employed or work a traditional 9-5 job, you will pay your taxes in one of two ways:
- Taxes deducted from your pay check (traditional W2 workers)
- Taxes paid quarterly (estimated taxes for 1099 workers such as freelancers, gig workers, and self-employed people)
- Taxes are not withheld from your pay if you are a 1099 worker (for example, real estate agents, Uber drivers, freelancers, or contractors). That means you’re on your own when it comes to paying taxes.
However, not every 1099 employee is required to pay quarterly taxes.
Is there a distinction between working as a 1099 contractor and working for yourself?
You are self-employed if you work as an independent contractor. This means that you must pay the Self-Employment Tax on your earnings.
How to make quarterly tax payments?
- Determine your adjusted gross income from self-employment for the calendar year.
- Calculate your estimated taxes using the IRS Form 1040-ES as a worksheet
If you have any of the following during the year, you may be required to pay quarterly taxes:
- You anticipate owing $1,000 or more in taxes.
– You earned more than $400 in self-employment/1099 income.
As per the IRS, the estimated taxes for 1099 includes: “Individuals, including sole proprietors, partners, and S corporation shareholders, generally must make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.”
When to file?
While the annual return is due on Tax Day (April 15), quarterly tax payments are due on the 15th of each quarter. Make sure that you pay your estimated taxes on time.
The four estimated tax payments are usually due on April 15, June, September, and January. If that date falls on a weekend or a federal holiday, the filing deadline is extended to the next business day. If you fail to pay on time, you may face a penalty.
If you received or made a payment as a small business or self-employed (individual), you must most likely file an information return with the IRS.
Deciding the Structure
When starting a business, you must decide what type of business entity to form. The type of business you operate determines which income tax return form you must file. The four most common business structures are
- sole proprietorship,
- partnership,
- corporation, and
- S corporation
To determine the estimated taxes for 1099, one must first decide on the business structure.
A Limited Liability Company (LLC) is a relatively new business structure permitted by state law.
Local and State Taxes
You may also be required to pay state and municipal taxes, depending on where you live. You probably already know if you have to pay state taxes, but if you don’t, you can find a link to your state’s tax authority at this State Tax Authorities website. Most states do not permit cities to tax people on their earnings, but as of 2019, 16 states allowed municipalities to levy their income taxes. Income is also taxed in some counties.
How much tax will you pay?
The estimated taxes for 1099 will be determined by various factors, including your income and the number of tax write-offs you discover. Nonetheless, independent contractors are usually required to pay the Self-Employment Tax and income tax.
With that in mind, it’s best to set aside about 25–30% of your self-employment income to pay taxes. Also, keep in mind that the more deductions you find, the less you’ll have to pay.
Deduction for Home Office
You may be able to deduct expenses for the business use of your home if you use a portion of your home for business purposes. The home office deduction is available to both homeowners and renters, and it applies to all types of residences.
What Is a Qualified Joint Venture for Married Couples?
According to estimated taxes for 1099, Family employees’ employment tax obligations may differ from those of other employees.
Unincorporated Businesses Election for Married Couples
The Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that for tax years beginning after December 31, 2006, a “qualified joint venture,” whose only members are a married couple filing jointly,
What if you didn’t make that much money?
Even if you only made a small amount of money, you may be required to pay quarterly taxes. The IRS expects you to make quarterly tax payments on your business profit for that tax year if you desire to owe $1,000 or more in taxes for the year (after deductions and credits). As a reminder, you are profitable if your self-employment income exceeds your business deductions.
When calculating what you owe each quarter, remember that you must pay 25% of the total that you expect to owe in a year rather than estimating what you’ll owe in each quarter. This is especially difficult for self-employed taxpayers whose income fluctuates throughout the year.
The bottom line:
If you have income that was not taxed and expect to owe $1,000 or more in taxes on all of your combined income for the year, you should consider paying quarterly taxes. Contractors and freelancers who work for themselves are usually required to make estimated taxes for 1099. Not only will you have to pay income tax, but you will also have to pay other taxes, the most notable of which is self-employment tax.