Quarterly taxes are one of the reasons why taxes can feel a little more complex for self-employed people. In this guide we’ll take you through the most common questions that Found gets about quarterly taxes, including how to figure out if you owe them, how to pay, and how to stay prepared for tax payments throughout the year.
Quarterly taxes—or “estimated taxes”—are tax payments that you may be required to pay throughout the year, if you receive income that doesn’t have taxes already withheld from it.
Some background info: All taxpayers are required to pay their taxes throughout the year as they earn income, not all at once when they file their tax returns. Many taxpayers don’t have to worry about making these tax payments on their own because their employers are already withholding taxes from their paychecks, and then sending those tax payments to the IRS on their behalf.
But most types of income don’t have taxes withheld, including self-employment income. When taxes aren’t withheld from your paycheck, you’ll need to make your tax payments on your own.
You’re required to pay quarterly taxes if you expect to owe more than $1,000 in taxes for a given year, and if those taxes aren’t being withheld for you already. A good rule of thumb to use is—if your business is making a profit of around $3,000 or more, you’ll likely owe quarterly taxes.
If you expect to owe less than $1,000, then you’re in the clear. For example, if your business only made enough profit this year to cause you to owe $600 in taxes, you wouldn’t be required to pay quarterly; you could just pay the entire $600 when you file your tax return.
Making both W-2 income, and self-employment income? You may be able to avoid the quarterly tax requirement, since you’re having taxes withheld from some of your income.
For example, let’s say you made $15,000 this year from a part-time W-2 job at a grocery store, and $10,000 from freelance writing. That combined income caused you to owe a total of $5,000 in taxes for the year. If you had $4,100 in taxes withheld from your paychecks at your grocery store job, then you’d only need to pay an additional $900 on your own. Since that $900 is below the $1,000 requirement, you wouldn’t be required to pay your taxes quarterly; you could pay that $900 at any point before Tax Day of the following year.
Filing jointly with a partner? Your joint tax return may also help you avoid the requirements for quarterly taxes. If you’re self-employed, but your partner has a W-2 job, their employer may be withholding enough taxes to cover your joint tax liability.
To figure out how much you’ll owe in taxes, you’ll need to estimate your taxable income for the upcoming year, find your owed tax, and (if you meet that $1,000 minimum), pay one fourth of your estimated balance each quarter.
Easier said than done, right? Figuring out exactly how much you should expect to owe can feel overwhelming, but there are a ton of online tools and softwares that can help you out.
If you use Found for your business bank account, you can view your current tax bill on your “Taxes” tab in your Found app. If that tax bill is higher than $1,000, you’ll know you need to pay quarterly.
If you’re not using Found, here are are a few other ways to estimate how much you owe:
Use the IRS’s “Tax Withholding Estimator.” It asks you to answer about 10 questions about your tax situation, and then will run the numbers on how much you should expect to owe for the year.
H&R Block’s 2020 W-4 Calculator. Similar to the IRS calculator, it’ll help you estimate your income and owed tax in just a few minutes
Fill out the IRS’s Form 1040-ES by hand if you’d prefer to do the math yourself. Form 1040-ES is a worksheet that basically works like a simplified tax return, where you input your income, adjustment, deduction, credit, and tax information, and the worksheet will help you figure how much you owe in taxes
Each of your four quarterly tax payments should roughly equal one-fourth of your total owed tax for the year. Owe $2,000 for the year? Each of your four payments should be roughly $500.
If you’re a Found account holder, you can have Found pay these taxes for you. A few weeks before each quarterly tax deadline, your Found app will ask you if you’d like to have your taxes paid on your behalf.
Otherwise, you can find a list of ways to pay on the IRS website here. You can pay in virtually any format that you’d like, including by debit card, bank transfer, cash, wire, check, or money order. You can also pay by credit card, if you’re willing to pay a 2% fee.
You can make these tax payments as often as you like, as long as you’ve paid the appropriate amount before each of the four quarterly tax deadlines. The quarterly tax deadlines for 2020 are:
July 15 (extended from its normal June 15 deadline)
January 15, 2021
We get this question a lot, since your tax estimate may change throughout the year as you make more or less income than you anticipated. If you’ve overpaid your taxes, you’d get a refund when you file your tax return the following year. If you’ve underpaid, you’d owe a “late payment” penalty, which is a monthly penalty of .5% of any owed tax that you failed to pay, for every month that you’re late. Late payment penalties accrue over time, and are capped at 25% of your total owed tax.
For example, if you have $1,000 in unpaid taxes, you’d owe $5 for every month that your balance stays unpaid.
That said, quarterly taxes are based on estimates! It’s virtually impossible to predict exactly how much you’ll owe for the year down to the dollar, so the IRS will waive this penalty if your payments were “close enough” to what you actually owed. There won’t be a penalty for any taxpayer if “they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.”
Translation - you’re exempt from this penalty if:
You paid at least 90% of the taxes that you owe for the this year
You paid 100% of your owed tax from last year
If you owe $2,000 in taxes in 2020, but only end up making quarterly payments of $1,800 throughout 2020, you’ve underpaid—but you’re in the clear since you paid 90% of what you owed.
Similarly, if you owed $2,000 this year, and owed $1,500 last year, you’re exempt from this penalty as long as you pay $1,500 this year (100% of last year’s owed tax).
If you use Found, your app will automatically set aside a portion of your income for taxes for you. If you’re not using Found, we recommend setting aside 25-30% of your income for taxes so that you’ll always be ready for the next tax payment. You may even consider setting this income aside in a separate bank account, so that it’s separated from any accounts that you use to make daily purchases. If you'd like to use Found for your business bank account, you can get started for free here.
Have questions about quarterly taxes? You’re not alone! Contact Found at firstname.lastname@example.org, and we’ll work with you to make the best decision for your tax situation.