What are Quarterly Estimated Tax Payments?
Quarterly Estimated Tax Payments refer to the estimated tax payments that small business owners and self-employed individuals need to report and pay every quarter. These payments cover Social Security, Medicare, and federal income tax payments, which are usually withheld by an employer.
Who Needs to Pay Estimated Tax Payments?
Generally, small business owners and self-employed individuals, such as freelancers and independent contractors, who owe at least $1,000 in taxes after subtracting withholding and refundable credits, need to make estimated tax payments quarterly.
How Much Do I Need to Pay?
You can use the IRS Form 1040-ES, Estimated Tax for Individuals or Form 1120-W, Estimated Tax for Corporations to determine if you are required to pay quarterly taxes, and how much you will need to pay. There are two taxes that you need to take into consideration when estimating your quarterly tax payment:
Self-employment tax: This tax accounts for your share of Medicare and Social Security. Since you don’t have an employer who takes these taxes out of your paycheck, you include your them in your quarterly tax payments. Currently, the self-employment tax rate is 15.3% (12.4% for Social Security and 2.9% for Medicare)
Income tax: This tax is based on your income tax rate. The tax rates for 2022 can be found on the IRS website.
If you find that throughout the year, you’re making more or less than you expected, then you may need to adjust your quarterly payments. For those who have jobs where income fluctuates seasonally, use the annual income installment method to determine quarterly payments that align with your income.
When are Estimated Tax Payments Due?
Estimated taxes are usually paid in four equal payments throughout the year. For the 2023 tax year, estimated taxes are due by the following dates:
First Payment for Q1 is due April 18, 2023
Second Payment for Q2 is due June 15, 2023
Third Payment for Q3 is due September 15, 2023
Fourth Payment for Q4 is due January 16, 2024
If you file your annual tax return by January 31, then you can pay the entire balance of your return by that date instead of paying for Q4 by the mid-January due date.
How Do I Pay Estimated Tax Payments?
Tax payments go to the IRS and you have a few options for how to pay:
Pay Online: Set up an account with the IRS to pay with your bank account (Direct Pay), credit card, or debit card or enroll in the Electronic Federal Tax Payment Service (EFTPS).
Pay by Phone: If you enroll in the EFTPS, you have the option to pay through their voice response system.
Pay by App: IRS2Go is the official mobile app of the IRS that allows you to use IRS Direct Pay to pay taxes directly from your bank account.
Pay in Person: Visit your local IRS office to pay by cash or check.
Pay by Mail: Mail in your tax payments to the IRS in the form of a check or money order. The mailing address is based on which state you live in. Go to the IRS Form 1040-ES under “Where To File Your Estimated Tax Payment Voucher if Paying by Check or Money Order” to find the correct address to mail your payment. The date of the U.S. postmark is considered the date of the payment.
What Happens If You're Late or Underpay?
Penalties for late payments on estimated taxes are determined by multiplying the number of days late by the interest rate for that period. Underpayment of estimated taxes may also be penalized. Generally, you can avoid a penalty for underpayment if you pay at least 90% of the taxes owed for the current year or make payments equal to 100% of the prior year's taxes shown on your return.
Final Notes
These are estimated tax payments and you will need to file an annual return to determine your actual tax payment. You may find that you were overpaying your taxes and getting a refund, or you may have underpaid and ended up owing.
There are a lot of variables that go into making estimated tax payments. We advise that you meet with your accountant or bookkeeper to ensure that your payments are accurate.