Should you make quarterly tax payments?

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Quarterly taxes are estimated payments made on a quarterly basis to the United States Internal Revenue Service for income that is …

Quarterly taxes are estimated payments made on a quarterly basis to the US Internal Revenue Service for income that is not subject to withholding. As the U.S. workforce increasingly engages in self-employment, side gigs, and self-employment, quarterly payments are a reality that more taxpayers may soon be faced with.

The group of self-employed Americans has grown since 2020: more than 10 million people in the United States were self-employed in September 2021, according to the United States Bureau of Labor Statistics, up from about 9.5 million in September 2020.

These self-employed workers are generally required to make quarterly payments, but some workers receiving W-2 salaried income may still need to make quarterly payments under certain circumstances. These payments can help taxpayers avoid a nasty surprise on April 15.

“The tendency is that most taxpayers who do not pay enough taxes throughout the year find themselves in a very tense situation at the end of the tax year when they file their tax return. They find themselves in a situation where they cannot pay their overdue taxes, ”explains Alex Oware, Chartered Accountant at O&G Tax and Accounting Services and Tax Expert at JustAnswer. “Instead, they can pay their taxes up front by making quarterly payments.”

When are quarterly taxes due in 2022

Quarterly installments are due on the following dates:

Payment deadline Due date
January 1 to March 31 April 15
April 1 to May 31 June 15
June 1 to August 31 September 15th
Sep 1 to Dec 31 January 15 of the following year

Quarterly taxes are not reserved for self-employed workers

Individuals who are self-employed – whether they are sole proprietors, partners, or shareholders of S corporations – typically have to make estimated tax payments if they expect to owe $ 1,000 or more when their return. of income is produced.

But quarterly taxes may also have to be paid in other situations where an individual’s withholding taxes are not sufficient. Estimated payments may need to be sent to cover income from the following sources:

– Game wins or other prizes.

– Dividends and interest.

– Divorce agreements and alimony.

– IRA distributions.

– Social security (if your income is high enough to make the benefits taxable).

– Self-employed worker or independent entrepreneur 1099 income.

Self-employed workers and independent contractors can sometimes avoid making quarterly payments.

“You could be self-employed and still pay yourself a salary. If you pay yourself a salary, you can adjust your deductions as you see fit and avoid making quarterly payments, ”says Deborah F. Graver, Certified Financial Planner and Director of Signature Financial Planning in Pittsburgh. “But people are often not sure what they are going to earn, so paying themselves a paycheck is difficult.”

[Read: Smart Tax Moves for Freelancers.]

And workers with W-2 income and a side job can also avoid making estimated quarterly payments by talking to their employer.

“If you’re earning a significant secondary income, you need to think about quarterly payments,” Oware explains. “If I have W-2 income and side work, I have to decide whether to ask my employer to increase my W-2 withholding or just pay the estimated taxes on the other side.”

How to estimate your quarterly taxes

Quarterly taxes are used to pay income tax as well as self-employment taxes and alternative minimum taxes, if applicable. To get a rough estimate of your quarterly taxes, Oware says taxpayers can take taxes owed last year and simply divide by four to estimate that year’s quarterly tax payments.

If a small business owner, for example, owed $ 2,000 after last year’s filing, he might expect to pay around $ 500 each quarter in estimated tax payments that year.

However, last year’s income may not be predictive of this year’s income if your financial situation has changed. To estimate your quarterly taxes as accurately as possible, taxpayers should complete the spreadsheet included in Form 1040-ES.

Year after year, self-employed taxpayers may be able to better estimate their tax liability by comparing their estimated quarterly payments to the result of their annual tax return.

“If you’re still paying taxes, you might be underestimating,” Oware says. “Every time you get a refund it means you are giving the government money without interest, you may overestimate.”

[Read: 15 Self-Employment Tax Deductions.]

How to make quarterly tax payments and avoid penalties

To make estimated tax payments, complete Form 1040-ES and submit your payment online, by phone, or by mail.

The penalty for failing to pay enough tax throughout the year includes tax owed plus interest. Taxpayers can avoid this penalty if they owe less than $ 1,000 in tax after subtracting their withholdings and credits, or by paying at least 90% of current year tax or 100% of tax. shown on the previous year’s return, according to the IRS website.

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Should you make quarterly tax payments? originally appeared on usnews.com

Update 10/14/21: This story was posted at an earlier date and has been updated with new information.

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