There are many that do not realize it is possible to pay taxes quarterly, instead of in one lump sum at the end of the tax year. Quarterly tax payments make a lot of sense for self-employed freelancers or small business owners since they must always pay back earnings to the federal government.
Opting to pay for taxes every quarter reduces the burden that small business owners and freelancers have in April when they discover that they might owe the IRS hundreds, if not thousands of dollars all at once. Therefore, periodic payments can help avoid your cash flow from getting severely disrupted.
Am I required to pay quarterly taxes?
In most instances the answer is no. Limited liability companies (LLCs) are only required to make quarterly tax payments if they are a single proprietorship. It is also not mandatory if the individual is expected to earn less than $1,000 in taxes after subtracting federal income tax.
However, some individuals still prefer to pay back taxes this way in order to reduce the fiscal burden at the end of the tax year.
What taxes do I need to pay?
Since independent contractors or small business owners receive their earnings with no taxes initially taken out, they have to pay back much more than your typical employee that earns a paycheck through another company and receives a W-4 at the end of the year.
Quarterly taxes are estimated, and account for self-employment tax (Social Security and Medicare) which is not initially taken out of the earnings, as well as income tax on the profits the independent contractor earned.
Self employment tax is high, and difficult to accurately project unless you have an accountant or a lot of experience dealing with quarterly taxes in the past. Therefore, it is a good idea to consult a tax expert for an accurate estimate on quarterly taxes.
How do I calculate quarterly taxes?
The IRS provides a form for small businesses that helps calculate quarterly taxes. It’s called the Form 1040-ES. The worksheet can walk you step by step through the calculations.
Once you determine your taxable income and payments, you then need to divide that number by four. It will give you an estimated sum that you should pay back to the IRS by each due date:
NOTE: Your quarterly payments do not need to remain fixed. The IRS is understanding that incomes can vary and are simply projected at this point. So, for example, if you lose a major client or gain a new one that might substantially change your earnings, you can also adjust your quarterly tax figure accordingly.
How do I pay quarterly taxes?
After you have successfully calculated your quarterly payments it’s time to pay the IRS. You have a few options to pay:
Then, when it comes time to submit your annual tax return in April, the IRS will collect any remaining balance of taxes owed and were not covered by the quarterly installments.
Conclusion
It is in your best interest to pay the government in periodic payments if you are an independent contractor (freelancer) or small business owner. Quarterly payments help keep you organized and on top of taxes to avoid major surprises at the end of the year.
By keeping tabs on your profits, losses, expenses, and other matters you can set aside money regularly to ensure you have enough funds to cover the amount you owe. Periodic payments are not all that bad if you plan and correctly anticipate the due dates.
It is recommended that you consult a bookkeeper, accountant, or tax pro before dealing with quarterly taxes. Levy & Tax Associates can help you estimate projected earnings and create a quarterly plan for your small business. Check out their official website: www.www.levytaxhelp.com.
Levy & Associates is available for free initial consultations. We’re happy to answer any questions you have about the audit process or address any concerns about your specific situation.
There’s never a good time to be audited, and the time-consuming process will take away from your business or family if you try to face it alone. Let us handle and coordinate communication, so you can return to your daily life.