I have been running my home business for almost six years now. As a result, I am well acquainted with the concept of paying quarterly estimated taxes. Paying quarterly estimated taxes not only keeps the IRS off your back, but it also helps you avoid a huge — and sometimes inconvenient — tax bill each year. If you have a home business, you need to seriously consider paying quarterly estimated payments.
Do You Have to Pay Estimated Taxes?
Generally, if you owe more than $1,000 at the end of the year, the IRS will penalize. That means that if you expect that you will owe more than $1,000 in taxes on your self-employment income, you should pay quarterly estimated taxes to avoid the penalty.
Note, too, that the IRS keeps track of when you pay, and when you should have paid. If you don’t pay your estimated quarterly taxes on the correct date. you will be charged interest for your late payments.
If you have a “regular” job, and your self-employment income is the result of a side hustle, you can get around paying quarterly estimated taxes by increasing your tax witholding from your paycheck. That way, your employer takes care of making sure the taxes are taken out. As long as you don’t make a lot more than you expected with your home business, your regular witholding can be sufficient to help you avoid a penalty.
Calculate Your Estimated Taxes
When you pay your quarterly estimated taxes, you are supposed to pay for the money you earned each quarter. So, when you make your quarterly payment on April 15, you are paying on the income you had from January 1 to March 31 of that year. Remember, though, that what you owe from the previous year is different, and you might have two tax bills due on April 15 .
If you want to figure your estimated taxes pretty close to the penny, you can look at your income tax, AGI, self-employment tax rate, and then multiply that by your profit each quarter. Although it is worthing noting that your second quarter taxes will actually only have two months, since they are due on June 15. This date means that your third quarter tax bill will encompass four months.
I find it too tedious to try and figure out what my estimated quarterly payments are based on what i actually make each quarter. Instead, I base my quarterly payments on what I made the previous year. If I paid $8,000 in taxes last year, it means that my quarterly estimated payments this year are $2,000 (e.g. $8,000/4). As long as you pay the same amount this year as you did last year, the IRS won’t penalize you if you owe more than $1,000 come tax time. This is a much easier way to determine your tax liability each quarter.
How to Pay Your Estimated Taxes
When you pay your quarterly taxes, you use Form 1040-ES. It’s possible to print these out from the IRS web site.
My accountant actually prints out my payment coupons for the whole year for me, and I just need to write the check and send it off. It’s also possible to to pay online, or set up an automatic withdrawal. The IRS will arrange to have your money withdrawn automatically, and you don’t have to worry about remembering to send a check. This can be a very convenient way to pay your quarterly taxes.
If you really want to maximize your situation, you can set aside money in a high-yield savings account each month. I like breaking down my payments by the month, since it makes them a little more manageable. In my earlier $8,000 example, that means putting $666.67 in an account each month. You earn interest on the money until you make your quarterly estimated payments. You can either have the amount automatically withdrawn from that account, or you can move the money to a checking account just before you pay.
Don’t Forget State Taxes
My state doesn’t require quarterly tax payments, but I’ve started sending them in anyway. That way, I don’t end up with an unpleasant surprise come tax time. Of course, I could set the money aside each month in a high-yield account and just make one big payment in April.
At any rate, make sure you check with your state to find out about estimated quarterly taxes. The federal government won’t collect your state taxes, so it’s up to you to make sure that you pay what you owe.