We look forward to all kinds of days throughout the year, like birthdays, wedding anniversaries, the Friday before a three-day weekend, Public holidays, etc. However, for the goal of this article, we will be looking at tax day.
But the irony is that we don't actually "pay" taxes on Tax Day. Actually, by the time the tax deadline comes, most working Americans will have paid their taxes in full. This is because your employers withhold taxes from their wages before it drops in your bank accounts.
But what if you are a freelancer, self-employed, or a contractor without an employer to withhold these taxes? Yes, you still have to pay taxes like everyone else. But it is now your responsibility to make sure you pay them off. And that means you can pay quarterly taxes to the IRS.
What are quarterly taxes?
Quarterly taxes (or sometimes called estimated taxes) are how self-employed people are required to pay taxes to the IRS throughout the year if their income exceeds a certain amount. Therefore, depending on how much you earn on your own, you may have not one but four "tax days" throughout the year.
These four tax payments made every quarter (three months) are intended to cover social security, health insurance, and income tax. Here are the two types of taxes you should be aware of:
Income Tax: You will pay income taxes based on your tax rate, just like everyone else.
Self-employment tax: this tax typically accounts for 15.3% of your income and converts your share of Medicare and Social Security taxes into a single tax. When you are employed, your employer shares the cost of these taxes with you; but you are responsible for everything as a self-employed.
Therefore, we recommend that you set aside 25-30% of each of your earnings for taxes if you are self-employed. That way, you won't be surprised with a huge payment tax bill.
Who pays the quarterly taxes?
Small business owners, independent contractors, and freelancers who expect to pay taxes of at least $1,000 on their self-employed income pay taxes quarterly. If you owe less than the stipulated amount, you can pay this income tax by filing your annual income tax return.
If you're unsure if you have to pay taxes quarterly, contact a tax professional who can help you determine your position. If you ended up owing a large amount and did not file quarterly, you may be required to pay an underpayment penalty on the taxes owed.
When are quarterly taxes due?
If you're one of the many who have to file quarterly, wrap those deadlines in your calendar, so you don't forget to pay on time. If you are late in paying your taxes, you will receive fines each month of up to 25% of your unpaid taxes. In a traditional exercise, these are the quarterly due dates.
How do I know how much I owe in quarterly taxes?
Okay, it's time to dust off your computer and do some numbers. Here's an overview to help you determine how much you'll pay in estimated quarterly taxes. Remember, this is only an estimate. Depending on your income, tax year, filing status, and allowable deductions, quarterly taxes may vary. And don't forget about state income tax!
Step 1: Calculate your taxable income this year.
Suppose you introduce yourself as single and have a small business that intends to generate gross income of $50,000 through self-employment. After deducting business expenses, taxable income is estimated to be approximately $35,000.
Step 2: Calculate the amount you owe for income tax and self-employment.
Using our example, with the current tax rate, you owe approximately $4,000 in income tax.
And, as mentioned earlier, the self-employment tax is usually 15.3% of your net income, which means you still owe $4,950 per year. Add income tax and personal income tax, and you will receive the estimated taxes for that year. In this case, the estimated total tax bill for the year is $8,950 (income tax $4000+ self-employment tax $4,950 = estimated total tax bill of $8950)
Step 3: Divide the total estimated tax amount into quarterly payments.
Since you owe more than $1,000 in taxes, the estimated annual taxes will be used as the basis for your quarterly taxes. All you have to do is divide the total amount into four quarterly payments to pay to the IRS every three months. If so, it would be $2,238 ($8,950/4 = $2,238)
Step 4: Submit an estimate of the quarterly tax payment to the IRS.
Now that you've calculated your quarterly tax payment, all that's left is to pay Uncle Sam! There are several ways to pay quarterly taxes:
Pay by the app: After all, we are in the 21st century, so now you can pay your taxes through the IRS2Go app directly from your phone or tablet.
Pay by cash or check: You can go old school and pay in person at your local IRS office or send a check or money order.
Pay by phone: You can sign up for the free Electronic Federal Tax Payment Service (EFTPS) and use its voice response to pay your taxes over the phone.
Pay online: You can access the IRS payment page and set up online payments for your taxes using a bank account or debit card.
And there are a few things to keep in mind. One of which is to keep in mind that the above charges are only an estimate. Then you need to file an annual tax return for everyone else, showing what you earned during the year. And second, if your business is doing well and you find that your income will be lower or higher than you expected, you can always adjust your estimated taxes each quarter. Otherwise, you could end up paying more on tax day if you paid less or receive a tax refund if you paid more like everyone else.
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THANKS FOR VISITING.
Don Bell Law