Underpaying quarterly taxes can result in significant penalties.
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If the IRS classifies you as self-employed, you are required to file an annual federal income tax return and pay estimated quarterly taxes on Form 1040-ES, Estimated Tax for Individuals. Estimated quarterly taxes are a prepayment of Social Security, Medicare and federal income taxes that self-employed individuals must pay because these workers do not have an employer to withhold taxes from a payroll check. The requirement to pay taxes quarterly ensures that you don't let your tax obligation get away from you and end up unable to pay your taxes when you file your annual return.
Retrieve your prior year's tax return. You need to transfer information from last year's tax return to Form 1040-ES.
Fill out the worksheet found in Form 1040-ES to make sure you are required to file quarterly estimated tax.
Complete Form 1040-ES. The form helps you figure out your expected adjusted gross income, taxable income, deductions and credits for the year. Much of this will be based on the amounts you reported on your last year's income tax return. If this is your first year being self-employed, you must estimate the amount of income
you expect to earn for the year.
Use a shorthand calculation method if you paid estimated taxes last year and expect your taxable income this year to be the same as last year or higher and do not want to go through filling out Form 1040-ES from scratch. Look at page two of last year's 1040, specifically the "total tax" entry. Deduct any withholdings you paid any source, including wages. This gives you the total amount of estimated tax owed. Divide the amount into four payments. You are protected against underpayment penalties using this method because the IRS offers a “safe harbor” to people who pay quarterly taxes based on the amount they had to pay last year.
Pay your estimated taxes. The year is divided into four quarters, and each quarter has a payment due date. You must pay your quarterly taxes by the due date. Use a blank voucher from Form 1040-ES if you want to send your payment in by mail. Each payment period has a separate voucher that is included in the Form 1040-ES package. Alternatively, use the Electronic Federal Tax Payment System to pay your estimated taxes electronically. If you use the EFTPS, you can pay your quarterly taxes in multiple installments, as long as the entire amount due is paid by the due date.