The ins-and-outs of quarterly taxes

What are quarterly taxes?

Estimated quarterly taxes are payments that are made four times a year for individuals who haven’t had withholdings taken by an employer. This means they earned their income from being self-employed. Normally, taxes are paid as you get paid. When you receive a paycheck, taxes are deducted from your gross income. You’re then paid the remainder. When you’re self-employed, this isn’t the case. You must deduct their taxes on their own accord. You’ll have to estimate your tax liability and pay it over the year, instead of one full payment before Tax Day.

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Quarterly taxes fall under two categories:

• Self-employment tax: If you are a salaried employee, this tax is normally split between you and your employer. It includes Medicare and Social Security taxes. However, when you are self-employed, you are fully responsible for this tax.
• Income tax: Income tax is inclusive of the profits your business made and any other income. This is like any other individual who is employed.

After the final payment is due at the end of year, you’ll still receive a tax return. The return will show the total payments made against the final tax liability. If the tax liability has been paid in full or overpaid, you’ll receive a refund. If money is owed against the tax liability, you’ll have to pay the remaining balance.

Who must pay quarterly taxes?

Quarterly taxes typically apply to people who are self-employed or earn a substantial amount of income outside of their employer. The IRS specifies that you need to pay estimated tax payments if you match the following criteria:

• You expect to owe $1,000 or more in federal income taxes, after accounting for withholding and refundable credits
• You expect your withholding and refundable credits to be less than the smaller of:
  • 90% of the tax to be shown on your current tax return
  • 100% of the tax shown on your previous year’s tax return

Individuals who are self-employed include freelancers, independent contractors, business owners, seasonal staff, and temporary workers. If you fall under any of these categories, review your withholding and refundable credits and estimate your federal income taxes to determine if you need to estimate quarterly tax payments. Individuals exempt from estimated quarterly tax payments include U.S. citizens and resident aliens who had no tax liability in the previous year.

How to estimate quarterly tax payments

To calculate your quarterly payments, you first need to calculate your tax liability for this year. Include your individual income tax, self-employment tax, and any additional taxes. Then you need to divide it by four to separate your liability into four payments. Estimated taxes can be calculated using the IRS’ Estimate Tax Worksheet. Individual filers use Form 1040-ES. Corporations use Form 1120-W.

For example, let’s say Marianne owns an eyebrow threading business and she estimates she will make $100,000 this year. After estimating her total income, Marianne considers the deductions she plans to claim, which total to $15,000. This brings her Adjusted Gross Income (AGI) to $85,000. Now that she knows her AGI, she can calculate her income and self-employment tax. The tax rate for single filers making $85,000 a year is 22%. You multiply her income by the tax rate (85,000 x 0.22), which brings her income tax liability to $18,700. The self-employment tax is 15.3%. You multiply this by Marianne’s income ($85,000 x .153) which brings her self-employment tax to $13,005. You add both tax estimates together, which equals $31,705, and divide it by four to calculate each estimated quarterly tax payment. For Marianne, this means making four payments of $7,926.25.

Quarterly deadlines for tax payments change year to year. For 2023-2024, the tax due dates are:

• April 18, 2023
• June 15, 2023
• September 15, 2023
• January 16, 2024

Be sure to check the IRS website for updates.

Filling taxes can be confusing. Luckily, Microsoft can help you maximize your tax return and help you with more budgeting tips.