Self-employed workers typically owe taxes quarterly if their tax bill is going to be more than $1,000 for the year, and there are penalties for underpayment. To avoid penalties, you have to pay at least 90% of your taxes owed for the current year or 100% of the tax owed on last year’s tax return (110% if you make over $150k).
Note that the tax periods are not normal quarters. The taxes are due as follows:
- For Jan 1 – Mar 31: Taxes due April 15
- For Apr 1 – May 31: Taxes due June 15
- For Jun 1 – Aug 31: Taxes due Sept 15
- For Sep 1 – Dec 31: Taxes due Jan 15
To pay your quarterly taxes, you’ll use the Form 1040-ES which you can find here. The Form 1040-ES has a voucher you can include if you mail in your payments, or you can use the Electronic Federal Tax Payment System (EFTPS) which can be found here.
If it’s your first year being self-employed, you’ll have to estimate the amount that you’ll earn. If you estimated your earnings too high or low, just fill out another Form 1040-ES to recalculate your estimated tax payment for the next quarter.
What happens if you miss a quarterly tax payment? The IRS looks at how much you owe, and how long it took for you to pay it, so pay it as soon as you realize to minimize the damage! Notably, the penalties are calculated by quarter and not the full year. So you can overpay at year end, but still face penalties if you missed one of the quarters. The IRS can be lenient, and will waive penalties if you became disabled; are 62 or older and ended up retiring; experienced a casualty, disaster, or other “unusual circumstance”; or can claim the first time penalty abatement waiver (more info on that here).
If you have highly seasonal income or had a large payment come late in the year, you may be able to minimize penalties by using the Annualized Income Installments alternative. It’s a little complicated, but you can find more information on it here. As an example, if you ran a snowmobile rental business, let’s say your quarterly income was $20k, $3k, $2k, and $20k. This method uses tax periods that run from (a) Jan 1 – March 31, (b) Jan 1 – May 31, (c) Jan 1 – Aug 31, and (d) Jan 1 – Dec 31. Each period has a multiplier, with (a) = 4, (b) = 2.4, (c) = 1.5, and (d) = 1. This is basically the IRS multiplying your year-to-date income to estimate your full year income. So for our snowmobile shop we’d pay taxes on $20k x 4 = $80k of annual estimated income in 1Q (so you’d pay taxes on a quarter of that estimated annual income). In 2Q, our estimated annual income would only be $23k x 2.4 = $55k. In 3Q, it’d drop to $25k x 1.5 = $37.5k, and in 4Q it’d be on the full $47k of income. So this method would help you pay lower taxes in the periods where your income is lower.