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Are You Self-Employed? Don't Forget to Pay Your Quarterly Tax Estimates

Are You Self-Employed? Don't Forget to Pay Your Quarterly Tax Estimates

For those who are self-employed, as well as a few other categories of taxpayers, the approach of the end of each quarter represents the time when they are expected to submit tax payments on the amount of income that they estimate they will make during the quarter. Though the second quarter's payment is generally due on June 15th, when that date falls on a Saturday or Sunday the payment due date rolls over to the next business day. For calendar year 2019, the due date for estimated taxes was June 17th. Most people calculate what they expect to make for the tax year early on, before submitting their first quarterly payment: they then reassess as the due date for the second quarter approaches to determine whether they need to adjust their quarterly payment up (if their income for 2019 is trending higher than they expected) or down (if their income for 2019 is trending lower).

Self-employed individuals are required to make these payments because their taxes are not withheld in the same way that W-2 employees' taxes are withheld. Other taxpayers who earn income on which taxes are not withheld are also required to make these payments. They include any W-2 employee for whom an adequate amount of withholding isn't being deducted; those who earn income as a result of investments, stock or property sales, partnerships or S-corporations; alimony; inherited pension plans; those who owe special taxes like the net investment income tax of 3.8% or household employee employment tax; and other income sources. No matter what category of income you receive for which the taxes owed are not withheld, failure to submit on a quarterly basis will lead to being assessed interest penalties.

Though the IRS refers to these payments as “quarterly”, the dates that they are due and the months' income that they cover do not align with even quarters on the calendar. Actual due dates and applicable income periods are shown on the table below:

Calculating the amount owed can be a challenge, and some taxpayers don’t earn enough income to owe that much in quarterly taxes. In recognition of this the government has created what is known as a “de minimis amount due,” and only applies a penalty in cases where the amount owed falls short of $1,000 (after withholding and refundable credits). Underpayment penalties begin to be assessed once the tax due reaches $1,000 or more.

Because four separate payments are due, the determination of underpayment is based on each quarter. This means that a taxpayer who pays less than actually owed for an early quarter can’t pay extra for the next quarter in order to eliminate the penalty that they owe. However, if the taxpayer overpays during a quarter, the overage will apply to the next quarter in which they owe.

If you fall into one of the categories for which a quarterly estimated payment is required, you need to understand the correct method for determining how much you need to submit throughout the year’s four installments. Assuming that your income is steady and can be projected, simply calculate the anticipated income and taxes and divide by four. Taxpayers whose income is more unpredictable or seasonal are permitted to use a special form that allows the payments to be based on the actual amount of income earned.

Safe harbor estimates are another way of avoiding paying underpayment penalties. Rather than estimating the amount of income that will be earned (and quarterly taxes due), the IRS permits taxpayers to base their payments on an amount that is equal to or greater than either 90% of the amount that they will owe in taxes for the year or 100% of the amount that they owed in taxes for the previous year. This method is available to all, though for those whose adjusted gross income exceeds $150,000 the percentages shift to 90% of the amount that they will owe in taxes for the year or 110% of the amount that they owed in taxes for the previous year.

Taxpayers whose employers withhold their taxes but who have additional sources of income often request that their employers boost the amount that they withhold to make up for the difference. Withholding calculations can be complex, and though the intention may be good, that won’t stop the IRS from assessing underpayment penalties if the adjustments don’t fully compensate for the untaxed income. The same is true for those who opt for using safe harbor percentages instead of calculating actual income: it’s a good idea to compare the amount that was calculated against the amount that you’re actually earning through the course of the year to ensure that you are submitting the correct amount.

If you are struggling with quarterly estimated tax calculations or are concerned that you are submitting either too much or not enough, contact a tax professional today for assistance.

Gordon W. McNamee, CPA writes for TaxBuzz, a tax news and advice website. Reach him and his team at [email protected].

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Gordon W. McNamee

Gordon W. McNamee

Gordon W. McNamee is a Certified Public Accountant (CPA) based in Rancho Cucamonga, CA. Gordon W. McNamee can assist you with your tax return preparation, payroll, accounting and tax planning needs. <br /> <br /> 2021 is Gordon W. McNamee, CPAs 38th year in the profession. As as a former IRS agent (1984 through 1987), Gordon has been in public accounting since 1987. Gordon specializes in individual, corporate, HOA, trust, estate and payroll taxes. He also prepares financial statements and provides accounting & bookkeeping services. He enjoys making his clients feel at ease while providing a personalized professional service.

GORDON W. MCNAMEE, CPA
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