Paying Estimated Quarterly Taxes: 6 Questions to Ask Yourself

February 25, 2021

Individuals and business owners who receive income that is not taxed may need to pay quarterly estimated taxes throughout the year.

1. Do I Need to Pay Estimated Taxes?

In general, if you aren't paying federal taxes through an employer, you'll probably need to stay on top of estimated taxes. The IRS advises taxpayers to calculate taxes on income that is not subject to withholding, including:

  • Self-employment income
  • "Gig worker" income (Uber, DoorDash, Instacart, etc.)
  • Dividend income
  • Rental income
  • Interest income
  • Capital gains
  • Unemployment compensation
  • The taxable portion of Social Security benefits

Examples include:

  • Freelancers
  • Contractors
  • Sole proprietors
  • S-Corp shareholders
  • Partners in a partnership
  • Landlords
  • Investors

Even if you have income that is taxed by an employer in addition to your self-employment or other side income, you should still pay estimated taxes on your side income.

The IRS requires taxpayers to pay estimated taxes if:

  • You will owe at least $1,000 in federal income taxes this year, after accounting for your withholdings. This can include refundable credits like the earned income credit, and
  • Your withholding and refundable credits will cover less than 90 percent of your tax liability for the current year or 100 percent of your liability last year — whichever is smaller. The threshold is 110 percent of your adjusted gross income (AGI) last year was more than $150,000 for married couples filing jointly or $75,000 for singles.

However, you don't have to pay estimated taxes if you're a U.S. citizen or resident alien, and you had no tax liability in the previous full tax year.

2. How Much Estimated Tax Do I Need to Pay?

As with all things involving taxes and IRS regulations: It depends.

A common rule-of-thumb recommended by tax pros is to set aside 25 to 30 percent of your net income. However, there are caveats to this general advice to keep in mind:

  • Sole proprietors, freelancers, and partners may be subject to an additional 15.3 percent self-employment tax, which goes toward Medicare and Social Security.
  • Farmers, fishers, and specific types of household employees follow a different procedure and tax table.  

It's better to estimate high and settle up at the end of the year to avoid paying the penalty.

3. How Do I Calculate Quarterly Estimated Taxes?

You have a few options:

  • You can estimate the amount of tax you think you will owe for the year and divide by four to figure out a quarterly payment amount. If you have a steady income, this is a straightforward option.
  • Or, estimate your annual tax liability based on what you've earned earlier in the year. If your income varies throughout the year, this could be your best approach. Use this IRS worksheet to calculate this figure.

If you determine that you over or underestimated your earnings after making a quarterly tax payment, you can recalculate ahead of the next quarterly payment. At the end of the year, you may need to attach IRS Form 2210 to explain why your quarterly payments were not equal.

4. How Do I Pay Estimated Quarterly Taxes?

The easiest way to pay estimated quarterly taxes is through IRS Direct Pay or the Electronic Federal Tax Payment System.

You can also mail a check or money order to the IRS. If you choose this option, you'll need to include a payment voucher (IRS Form 1040-ES) with the payment.

5. When Do I Have to Pay Estimated Quarterly Taxes?

Estimated quarterly taxes are due as follows:

1st Quarter: April 15 (for January 1 to March 31 income)

2nd Quarter: June 15 (for April 1 to May 31 income)

3rd Quarter: September 15 (for June 1 to August 31 income)

4th Quarter: January 15 of the following year (for September 1 to December 31 income)

For 2020 only, the 1st and 2nd quarter estimated taxes were due July 15, 2020.

If you follow a fiscal tax year, due dates may vary.

6. What if I Don't Pay Enough Estimated Quarterly Taxes?

It's essential to estimate your quarterly tax obligation carefully. The IRS charges a penalty for underpaying estimated taxes in a given quarter. The penalty rate varies each quarter — it is the federal short term borrowing rate plus three percentage points:

  • For Q1 and Q2, 2020, the penalty rate is 5 percent.
  • For Q3, the penalty rate is 3 percent.

You are not subject to the penalty if your withholding and estimated quarterly tax payments were at least as much as your prior-year tax.

The Safe Harbor provision says the IRS will not penalize you for underpaying estimated taxes as long as you pay at least 90 percent of the current year's tax or 110 percent of the prior year's tax, whichever is less.

When in Doubt, Reach Out

The Lunafi app lets you see tax savings and taxes owed in real-time, so you'll always be ready for quarterly tax time.

Estimating quarterly taxes can be quite complicated. If you have questions or uncertainty, it's a good idea to find a qualified tax preparer who understands your specific situation.

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