Individuals and business owners who receive income that is not taxed may need to pay quarterly estimated taxes throughout the year.
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:
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:
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.
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:
It's better to estimate high and settle up at the end of the year to avoid paying the penalty.
You have a few options:
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.
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.
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.
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:
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.
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.
If you wonder what is schedule C on a tax return, read the basics of a Schedule C form for freelancers in this article.
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