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Guide to Quarterly Self-Employed Taxes

A freelancer's guide to navigating and paying quarterly estimated taxes
Accounting and TaxesDecember 14, 2023

If you’re a self-employed individual, small business owner, or independent contractor, the thought of managing quarterly taxes can be panic-inducing. Unlike traditional employees whose taxes are withheld by employers, you're in the driver's seat for ensuring you meet your tax obligations throughout the year.

In this guide, we'll demystify the world of quarterly taxes. You'll learn not just the 'what' and 'why,' but also the 'how' of managing these taxes efficiently. Whether you're making extra cash through a side hustle or rockin’ the full-time entrepreneur life, you're in the right place. We’ll cover:

  • What quarterly taxes are and who needs to pay them

  • How to estimate your taxable income and figure out what you owe

  • When and how to make your payment

  • How to avoid IRS penalties

Bookmark this guide so you're more than prepared when payments come due next quarter.

What are quarterly taxes?

Quarterly taxes—or “estimated taxes”—are periodic payments you may be required to make to the IRS if you receive income that doesn’t have taxes already withheld from it. 

The IRS uses a “pay as you go” tax system where everyone is required to pay taxes throughout the year as they earn income—not just all at once when they file their tax returns. 

Many workers don’t have to worry about making these tax payments on their own because their employers withhold taxes from their paychecks, and then send those tax payments to the IRS on their behalf.

But other 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.

Do you need to pay quarterly taxes?

If you’re making money on your own—like from a small business, freelancing, or a side job—and you think you’ll owe more than $1,000 in taxes for the year, you’ll likely need to pay quarterly taxes. This $1,000 limit is the threshold for paying quarterly estimated taxes. 

Understanding the $1,000 tax rule

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 is that if your business or side hustle 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 likely 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.

What if you have W-2 and self-employment income?

If you make both W-2 income and self-employment income, you may be able to avoid the quarterly tax requirement. This is because taxes are already 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.

What if you file 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.

How to calculate your quarterly tax payments

Knowing you need to pay quarterly taxes is one thing, but figuring out how much to pay is where the real challenge lies. 

Here’s the scoop: 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? Here's a longer, step-by-step guide:

Step 1: Estimate your taxable income

Begin by estimating your total revenue for the year. This includes all earnings from your freelance business or self-employment work, plus any other income sources, like investments or rental income. Don't forget to account for any deductible business expenses, as they can significantly lower your taxable income.

Step 2: Determine your federal tax liability

Once you've estimated your taxable income, apply the current income tax rates to determine your federal tax liability. Remember, your tax rate may vary based on your income level, filing status and whether you’re itemizing deductions or taking the standard deduction. 

Once you have your estimated income tax, add your self-employment tax to it, which covers Social Security and Medicare. This is typically 15.3% of your net income from self-employment. Together, these numbers give you your estimated taxes. 

For instance, if your estimated income tax is $5,000 and your estimated self-employment tax is $3,000, your total estimated tax bill for the year is $8,000.

Step 3: Calculate your quarterly payments

Once you've estimated your taxable income and figured out your total tax liability, if it exceeds $1,000, you need to make quarterly tax payments. Divide your estimated tax liability by four to get your quarterly payment amount. For instance, if you owe $8,000 for the year, each of your quarterly payments should be equal installments of about $2,000.

Online tools to help you estimate your taxes

While calculating your taxes might seem daunting, several tools can simplify the process:

  • Found App for Business Bank Accounts (easiest way!) If you use Found for your business bank account, you can always know what you owe. Found updates your tax estimate in real time with every new income or expense. 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 a few other ways to estimate how much you owe:

  • IRS Tax Withholding Estimator. This tool asks a series of questions about your tax situation and then calculates your estimated tax liability for the year.

  • H&R Block’s W-4 Calculator. Similar to the IRS calculator, it’ll help you estimate your income and owed tax in just a few minutes.

  • IRS Form 1040-ES. For those who prefer a more hands-on approach, filling out this form can help. It functions like a simplified tax return, helping you calculate your estimated taxes based on income, adjustments, deductions, credits, and taxes.

Quarterly taxes due dates

Quarterly tax payments are due four times a year, generally on the following schedule:

  • 1st Payment: Due April 15, for income earned from January 1 to March 31.

  • 2nd Payment: Due June 15, for income earned from April 1 to May 31.

  • 3rd Payment: Due September 15, for income earned from June 1 to August 31.

  • 4th Payment: Due January 15 of the following year, for income earned from September 1 to December 31.

If these dates fall on a weekend or a holiday, the due date is the next business day. Mark these tax deadlines in your calendar to avoid missing a payment next quarter.

How to make quarterly estimated payments 

There are several ways to pay IRS quarterly estimated taxes each payment period. 

  • Found app (easiest way!): If you use Found for your business banking and file a Schedule C, you can make in-app quarterly federal tax payments as a Found Plus subscriber.  

  • IRS Direct Pay: Direct Pay is a secure service on the IRS website. It allows you to pay directly from your bank account without any fees. You simply enter your tax information, verify your identity, and authorize the transaction.

  • IRS2Go mobile app: If you have IRS2Go on your mobile device, you can make estimated quarterly tax payments that way too. You can use your bank account or pay with a credit card or debit card. Just be mindful of the 2% processing fee.

  • Electronic Federal Tax Payment System (EFTPS): This government-run system offers high security for your tax payments. You need to enroll in EFTPS, after which you can schedule and make payments online or by phone.

  • Mailing checks or money orders: For those who prefer traditional methods, you can mail a check or money order to the IRS. Ensure to include the correct voucher form and mail it to the proper address for your location.

  • Cash payments: You can pay in cash at select IRS retail partners. This requires a visit to an IRS-approved retail location where you can make your payment directly.

What happens if I don’t pay, or if I pay the wrong amount?

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 income tax return the following year. 

  • If you’ve underpaid, you’d owe a “late payment” penalty, a monthly penalty of .5% of any owed tax that you failed to pay, for every month 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.

Safe harbor rules for when you’re “close enough”

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 has special rules that will waive this penalty if your payments are “close enough” to what you actually owe. 

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:

  1. You paid at least 90% of the taxes that you owe for this year

  2. You paid 100% of your owed tax from the previous year

If you owe $2,000 in taxes in 2024, but only end up making quarterly payments of $1,800 throughout 2024, 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).

It’s a good idea to consult a tax professional (like a CPA) if you’re worried about underpaying or have questions about your specific situation.  

Avoid estimated tax penalties with Found

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. Found makes it easy to save for taxes with Pockets—as soon as you create your account, you’ll see a dedicated “pocket” just for quarterly estimated taxes! Sign up for free now

Frequently asked questions about quarterly taxes

What determines if you have to pay quarterly taxes? 

If you're making money outside of regular employment, you're likely on the hook for quarterly estimated taxes. You commonly pay these taxes on earned income from self-employment, interest, dividends, alimony, rent, and capital gains from the sale of assets, prizes, and awards. 

Who would most likely pay estimated quarterly taxes? 

If you anticipate owing more than $1,000 in taxes for the year and your tax isn't being withheld by an employer, it's time to look at quarterly taxes. This includes business entities like sole proprietors, partners and S corporation shareholders. Remember, staying ahead of your tax obligations helps avoid unexpected year-end tax bills and penalties.

Will I get in trouble for not paying quarterly taxes?

If you should be paying quarterly and don't, the IRS may impose an underpayment penalty. This penalty is essentially an interest charge on the amount you didn't pay on time. The penalty rate is determined by the IRS and can vary each year. 

However, if you paid at least 90% of your current year's tax liability or 100% of the tax shown on your return for the prior tax year (110% if your adjusted gross income is more than $150,000), you might avoid this penalty. 

Disclaimer: The information on this website is not intended to provide, and should not be relied on, for tax advice.

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