What Are Quarterly Estimated Taxes And When Do You Have To Pay Them?
When you are starting a business for the first time, there are many new things that you will need to learn to do, not least of which is how to properly pay your taxes. For instance, did you know that as an individual who receives income outside of full-time employment, you have to pay quarterly estimated taxes?
What are quarterly estimated taxes?
If your company is not withholding any taxes from you and submitting them to the government on a regular basis, then you yourself have to submit taxes to the government. As a self-employed individual, you need to submit taxes four times a year, on a quarterly basis: on April 15, June 15, September 15 and January 15. The logic behind “quarterly estimated taxes” is that everyone has to submit income taxes to the government on a regular basis. Full-time employees submit their income taxes to the government at least once a month, through their company. You as a individual also needs to submit income taxes to the government, in this case four times a year.
Who has to pay quarterly estimated taxes?
Anyone who receives income that is not subject to withholding has to pay quarterly estimated taxes. The taxes you owe are a combination of self-employment, interest, dividends, rent and alimony. If you are not hired as a full-time W2 employee, you are probably subject to pay quarterly estimated taxes, so be prepared.
How much do you have to pay?
In order to find out how much your quarterly estimated taxes are, use the Withholding Calculator on the IRS website. Follow the questionnaire on the website and you will find out how much estimated taxes you are supposed to remit.
What is the difference between filing taxes and paying taxes?
I know it might sound silly, but let me tell you why I want to bring up this question. Filing taxes and paying taxes are completely separate things:
Filing taxes = You submit relevant information on the taxes you owe, but do not make the payment.
Paying taxes = You make the payment, without filing tax-related information.
It is usually more important to make tax payments on time than to simply file taxes. You can apply for an extension to file taxes later, but you should always try to make the payment on time. Otherwise, there will be penalties and interests.
How do you file quarterly estimated taxes?
You have two options to file quarterly estimated taxes and make the payment:
1. By mail: Form 1040-ES
2. Electronically: Electronic Federal Tax Payment System (EFTPS)
Why it is good to make tax payments four times a year?
1. As opposed to paying a lump sum of the taxes at once, you can pay smaller amounts four times a year
2. If you don’t pay your estimated taxes quarterly, you will get a penalty
3. It is easier to keep track of three months of transactions instead of twelve months of transactions
What if you underpaid your quarterly estimated taxes?
If you are really concerned that you underpaid your quarterly estimated taxes, you can use form 2210, Underpayment for Estimated Tax by Individuals, Estates, and Trusts, to find out how much you still need to pay. If this form looks intimidating, no need to panic! Remember that Advisori Finance is here to help you every step of the way!
Takeaways:
Ignoring your quarterly estimated taxes is not going to make them go away. If you are self-employed, you need to pay your quarterly estimated taxes or the IRS will penalize you at the end of the year, and you could be subject to interest on late payments. If you have completely missed one (or more) of the quarterly payment deadlines, it’s vital to make the tax payments on as soon as possible to avoid penalties and interest if possible. Use the links above to make your proper quarterly estimated tax payments, and contact Advisori Finance if you need any help along the way.
