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A Guide to Paying Quarterly Taxes

Updated for Tax Year 2022 • October 18, 2022 09:29 AM


OVERVIEW

Self-employed taxpayers likely need to pay quarterly tax payments and meet key IRS deadlines. Here’s a closer look at how quarterly taxes work and what you need to know when filing your tax returns.


For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.


 

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Estimated tax payments

Working for yourself presents a host of benefits, such as never having to report to a boss and setting your own hours. It also carries a few added tax requirements, such as paying your taxes quarterly instead of with each paycheck as a W-2 employee would.

Keep reading to learn answers to questions like, "Who has to pay quarterly taxes?" "When are quarterly taxes due?" and "How do I pay quarterly taxes?"

Who is required to file quarterly taxes?

If you work as a self-employed individual or small business owner, you likely need to pay quarterly estimated taxes. You're typically considered self-employed if you work as:

  • An independent contractor
  • A sole proprietor
  • A member of a partnership that conducts business, such as an LLC
  • A person who runs a business as your own, including part-time

Who should pay estimated taxes?

The IRS uses a pay-as-you-go income tax system, meaning you must pay your taxes as you earn income. It enforces this by charging penalties for underpayment if you haven't paid enough income taxes through withholding or making quarterly estimated payments. It also charges penalties on late payments even if you end up getting a refund.

The IRS uses a couple of rules to determine if you need to make quarterly estimated tax payments:

  • You expect to owe more than $1,000 after subtracting withholding and tax credits when filing your return, or
  • You expect your withholding and tax credits to be less than:
    • 90% of your estimated tax liability for the current tax year
    • 100% of the previous year's tax liability, assuming it covers all 12 months of the calendar year

These are commonly referred to as safe harbor rules. The 100% requirement increases to 110% if your adjusted gross income exceeds $150,000 ($75,000, if you're married and file separately).

One exception applies to individuals who earn at least two-thirds of their income from farming or fishing. The requirement is to pay in two-thirds of your current year tax or 100% of your prior year tax. Also, there is only one estimated tax payment date - January 15 of the following year. Additionally, if you file and pay in full by March 1, then estimated tax payments are not required.

Paying your taxes quarterly can avoid the cash crunch you might face come tax time. Paying in quarterly installments can make paying your bill far easier than one lump sum payment, especially if you've underestimated your taxes due.

What taxes do self-employed people pay?

As a self-employed individual, you file an annual tax return but typically pay estimated taxes every quarter. Quarterly taxes generally include two categories:

  • Self-employment tax (Social Security and Medicare)
  • Income tax on the profits that your business made and any other income

For example, in the 20221 tax year:

  • The self-employment tax rate on net income up to $147,000 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 earned income of $200,000 and above or married couples with incomes of $250,000 or more — are subject to an additional Medicare tax of 0.9%.

To estimate your taxable income as a business owner:

  • Take your expected annual gross income — the total revenue you received — and deduct expenses and any deductions you're eligible for. For example, if your annual revenue came to $100,000 and you had business deductions that total $30,000, your taxable income amounts to $70,000.
    • $100,000 - $30,000 = $70,000 taxable income
  • The IRS 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 have 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, revisit the worksheet to ensure you're paying the appropriate amounts.

What is the qualified business income deduction?

You may have a chance to reduce your self-employment income further by claiming the qualified business income (QBI) deduction. This allows you to reduce your pass-through income from self-employment or owning a small business by up to 20% on your tax return.

You can reduce the net amount of qualified items of income, gains, deductions, and losses tied to your trade or business. This means items like capital gains and losses, dividends, interest income, and other nonbusiness gains and losses don't figure into this calculation.

In general, to claim the QBI deduction, your taxable income must fall below $170,050 for single filers or $340,100 for joint filers in 2022. Tax year 2021 has limits of $164,900 and $329,800, respectively.

You first determine your self-employment or business income and report your adjusted gross income on Form 1040. From there, you can calculate this pass-through deduction.

When are quarterly taxes due for 2022 and 2023?

To avoid an Underpayment of Estimated Tax penalty, be sure to make your payments on time for tax year 2022:

1st Quarterly Estimated Tax Payment  April 18, 2022
2nd Quarterly Estimated Tax Payment  June 15, 2022
3rd Quarterly Estimated Tax Payment  September 15, 2022
4th Quarterly Estimated Tax Payment January 17, 2023 (or you can file your tax return by February 1, 2023, with your full remaining payment and not submit this quarterly payment)

For tax year 2023, the following payment dates apply for avoiding penalties:

1st Quarterly Estimated Tax Payment  April 18, 2023
2nd Quarterly Estimated Tax Payment  June 15, 2023
3rd Quarterly Estimated Tax Payment  September 15, 2023
4th Quarterly Estimated Tax Payment  January 15, 2024

How to pay quarterly taxes

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'll pay the balance of taxes that weren't covered by your quarterly payments.

You have other options as well when you show an overpayment of tax after completing Form 1040 or 1040-SR. You can apply all or part of your overpayment to go toward your estimated tax for the current tax year rather than be refunded.

Consider this amount when estimating your tax payments for the current tax year. You can treat the overpayment credited toward your estimated taxes as a payment made on the April deadline for the first quarter of the current tax year.

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.

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