What You Should Know about Quarterly Estimated Tax Payments

The second quarter of the year has ended. For most individuals, fiscal quarters don’t mean much. For business owners, however, the ending of each quarter brings with it a number of accounting tasks that must be tended to—and each of them must be done accurately and on time. One key task that business owners, including freelancers and contract workers, can’t overlook is making quarterly estimated tax payments. If you haven’t made an estimated tax payment this year, and you receive untaxed income from your business, keep reading; our tax experts can give you the important information you need to avoid unnecessary fees and penalties.

What Are Quarterly Estimated Tax Payments

For employees that receive a W-2, the IRS withholds taxes before you even receive your paycheck. This makes all of your W-2 income post-tax income. However, if you own a business or perform contract work, you’re most likely receiving payments from your clients without any withholdings. However, the US tax system is based on a pay-as-you-earn model. This means that you’re expected to pay taxes on your income as it’s earned, and not just when tax season rolls around. So, for those who receive untaxed income, there are quarterly estimated tax payments—payments made to the IRS four times a year to cover your expected tax liability. This ensures that your taxes are paid throughout the year.

But why does that even matter? Why not just pay your taxes when you file, when you know exactly how much you made and exactly how much you will owe? While making these payments helps business owners to better manage their tax debt throughout the year, there’s another, more important reason to make your estimated tax payments each quarter: It’s the law. While the IRS does not expect you to be perfect in your estimated payments, drastically underpaying on your taxes throughout the year (or not making any payments at all until tax season) can result in penalties and interest charges against you.

How to Calculate Your Payments

So you know why you need to make these payments, but how much do you need to pay? As the name implies, these payments are an estimate, but each one should be a very educated guess and not just a shot in the dark. Here’s how to calculate your quarterly estimated payments each quarter:

1. Estimate Your Income – First, you’ll need to estimate how much you believe you’ll make this year. This can be based on your previous year’s income, or an average of several years. Be sure to include all revenue sources. 
2. Subtract Deductions and Credits – Deduct any business expenses and apply any tax credits for which you’re eligible. This will give you your total taxable income.

Calculate Your Annual Tax – Based on your estimated income for the year, use the IRS’s tax tables to calculate how much tax you’ll owe for the entire calendar year.

Divide by Four – Once you have the total taxes you’ll owe, divide that by four to know how much to pay each quarter.

You should recalculate this amount each quarter, based on how your income changes throughout the year. If you see a spike in income that wasn’t there in previous years, increase your payment amount.

How to Make Your Payments

Now that you know how much you should be paying for the quarter, you need to know how to make your payments to the IRS. This can be done using several different methods:

• Electronic Federal Tax Payment System (EFTPS): A free service for paying federal taxes online.
• Direct Pay: Pay directly from your bank account through the IRS Direct Pay system.
• Credit or Debit Card: Pay using a credit or debit card; processing fees may apply.
• Check or Money Order: Mail a check or money order with the payment voucher from Form 1040-ES.

Regardless of the method you choose, you should fill out Form 1040-ES, which includes a worksheet to help you calculate your estimated tax payments.

When to Make Your Payments

Like all things tax related, your quarterly estimated tax payments have deadlines. Your quarterly payments are due on April 15 for Q1, June 15 for Q2, September 15 for Q3, and January 15 of the next year for Q4.

Failing to make quarterly estimated tax payments or drastically underpaying can result in penalties and interest charges from the IRS. The penalty amount is calculated based on just how much you underpaid, and any interest owed is compounded daily. So, if you’ve fallen behind on your quarterly estimated tax payments, we strongly recommend reaching out to an experienced CPA for help getting back on track.

The Provo tax experts here at The Accounting Guys have ample experience working with business owners and contract workers who are required to make these quarterly estimated tax payments. We can help you to calculate the amount you should be paying each quarter and help ensure you get those payments in on time. Contact us today to schedule a consultation.