As a small business owner or freelancer, you’ll find that mastering your quarterly taxes is a key part of running a successful company. Here’s a closer look at how quarterly taxes work and what you need to know when filing your tax returns.
UPDATE: The Treasury recently announced tax changes and updates in response to COVID-19. Updates include an extension until July 15, 2020 for all taxpayers that have a filing or payment deadline that normally falls on or after April 1, 2020 and before July 1, 2020. Please see the latest information on tax deadlines and stimulus updates related to COVID-19 on the TurboTax Coronavirus Tax Center and detailed information about federal and state tax changes on our Coronavirus blog post.
Who is required to file quarterly taxes?
Anyone who is self-employed may be required to pay quarterly estimated taxes. A self-employed person is someone who:
- Is an independent contractor
- Works in a trade or field as a sole proprietor
- Is a member of a partnership that conducts business, such as an LLC
- Runs a business on their own, including a part-time business
What taxes do self-employed people pay?
As a self-employed individual, you file an annual return but usually pay estimated taxes on a quarterly basis. Quarterly taxes generally fall into two categories:
- The self-employment tax (Social Security and Medicare)
- Income tax on the profits that your business made and any other income
In the 2019 tax year, for example,
- The self-employment tax rate on net income up to $132,900 is 15.3%. That breaks down to 12.4% Social Security tax and 2.9% Medicare tax. As your income increases past this amount, the 2.9% Medicare tax continues but the Social Security portion stops.
- High earners—generally, individuals with incomes of $200,000 or married couples with incomes of $250,000—are subject to an Additional Medicare Tax of 0.9%.
To calculate your taxable income as a business owner,
- Take your annual gross income—the total revenue you received—and deduct expenses and any deductions you’re eligible for. For example, if your annual revenue was $100,000 and you have business deductions that total $30,000, your taxable income is $70,000.
- $100,000 - $30,000 = $70,000 taxable income
- The Internal Revenue Service provides a full listing and reference guide for small business owners. IRS Form 1040-ES is a worksheet that takes you through that calculation and helps you determine your taxable income and payments.
- Once you have an estimate for the taxes you’ll owe for the year, divide that number by four and submit your quarterly payments by their due dates.
If you undergo significant changes in income or expenses during the year, that may impact the quarterly taxes you need to pay. For example,
- If your company loses a big customer and your income drops as a result, you can adjust your quarterly payments accordingly.
- If you land a major contract that increases your income, it may be prudent to revisit the worksheet to ensure that you are paying the appropriate amounts.
When are quarterly estimated taxes due for 2020?
To avoid an Underpayment of Estimated Tax penalty, be sure to make your payment on time:
- 1st Quarterly Estimated Tax Payment - July 15, 2020 (Was April 15, 2020)
- 2nd Quarterly Estimated Tax Payment - July 15, 2020 (Was June 15, 2020)
- 3rd Quarterly Estimated Tax Payment - September 15, 2020
- 4th Quarterly Estimated Tax Payment - January 15, 2021
How to pay quarterly payments
Once you’ve calculated your quarterly payments,
- You can submit them online through the Electronic Federal Tax Payment System.
- You can also pay using paper forms supplied by the IRS.
- When you file your annual tax return, you will pay the balance of taxes that were not covered by your quarterly payments.
You can use your new total annual income to estimate your quarterly payments for the next tax year. You can also use software like Quickbooks Self Employed to track your income, expenses, and deductions throughout the year, which will help with estimating your quarterly payments.
When it comes tax time, TurboTax will ask you simple questions and fill out all the right forms for you to maximize your tax deductions.
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