Understanding Quarterly Taxes – Who Needs to Pay and Why?

accountant preparing quarterly taxes
June 10, 2024

When it comes to how and when to file tax returns, not all Americans go through the same process. While many people are used to dealing with their federal and state taxes once a year by filing a single annual return, for small business owners, freelancers, and anyone who makes extra income, quarterly tax payments are a regular necessity. 

An expert in small business accounting services and tax return preparation services can eliminate the headaches associated with calculating and submitting these four-time-a-year payments on a state and federal level.  

However, it’s helpful to understand how quarterly taxes work, who needs to pay these taxes, and the possible penalties that may be incurred if your quarterly taxes fall off your radar.  

What are Estimated Quarterly Taxes and Who Pays Them? 

As the name suggests, quarterly taxes are taxes paid to the IRS in three-month increments throughout the year, instead of once a year before the annual April 15 deadline.  

As a rule of thumb (and per the IRS), individuals, including sole proprietors, partners, and S corporation shareholders, generally must make estimated tax payments if they expect to owe taxes of $1,000 or more when their return is filed. Meanwhile, corporations generally must make estimated tax payments if they expect to owe taxes of $500 or more when their return is filed. 

So, if you do not have taxes regularly withheld from your paycheck because you are a freelancer, are self-employed, or own a small business, then you are responsible for paying quarterly taxes to avoid a penalty. 

What Do Quarterly Taxes Include? 

Your quarterly taxes include federal income tax, state income tax (if applicable), and self-employment tax, which covers Social Security and Medicare. 

When are Quarterly Taxes Due? 

The exact due dates for quarterly taxes may vary slightly from year to year. However, for 2024, the following due dates – (and the timeframes that these payments cover) – are as follows: 

  • January 16, 2024 – For income earned September 1 through December 31, 2023 
  • April 15, 2024 – For income earned January 1 through March 31, 2024 
  • June 17, 2024 – For income earned April 1 through May 31, 2024 
  • September 16, 2024 – For income earned June 1 through August 31, 2024 
  • January 15, 2025 – For income earned September 1 through December 31, 2024 

How Do I Know How Much to Pay in Estimated Quarterly Taxes? 

The best way to accurately understand how much you will need to pay in quarterly taxes is to reach out to an expert in self-employed and small business accounting. However, there are two ways that you can create a rough calculation of how much you should pay every three months. 

Estimate Based on How Much You Paid the Prior Year 

With this simple method, take what you owed last year and divide it by four. This is a good option if you have been earning income without any taxes withheld for several years, and the amount you earn year to year (as well as your deductions and withholdings) is basically the same. 

Estimated By Annualizing 

In this method, you calculate your quarterly payments based on your earnings at each point in the year.  

So, for example, at the end of the first quarter, you will make a tax payment based on what you earned during the first three months of the year. At the end of the second quarter, you’d make a tax payment based on the first six months of the year, and so on.  

This is a much more accurate way to estimate the taxes you owe. However, it’s also much more time-consuming and involves calculating an annual return four times a year instead of once. (Tip: Enlisting accountant services for small business owners and/or self-employed individuals is a much easier way to avoid these time-consuming calculations but ensure accuracy.) 

How Do I Pay Quarterly Taxes? 

There are a few different options for filing and paying your quarterly taxes with the IRS. 

If you regularly pay by mail, you can send a check along with a completed Form 1040-ES (which stands for “estimated taxes.”) You can also pay online or over the phone through the relatively new and recently improved IRS2GO app or via the IRS’ Electronic Federal Tax Payment System (EFTPS). 

Remember that you may also owe state taxes, and how you pay these quarterly taxes will vary from state to state. 

What Happens if I Don’t Pay Estimated Quarterly Taxes? 

If you don’t make any estimated payments throughout the year but should have, you’ll have to pay an underpayment penalty when you file your annual return. The penalty will depend on the total amount of taxes you owe for the year, the period for which you underpaid, and the interest rate, which may be adjusted quarterly. 

In 2024, the IRS raised its penalty interest rate for individuals to 8% per year. This increased 8% rate went into effect at the end of 2023 and is the highest penalty rate since early 2007. For comparison, just two years ago, for the tax year 2021, the penalty rate was 5%.  

What’s the Best Way to Navigate Estimated Quarterly Taxes? 

If you have any questions about whether you’re likely to owe quarterly payments, or just want a hand in taking this burden off your shoulders, then Waters Hardy can help. 

Offering expert and professional accountant services for small business owners, freelancers, and anyone whose annual taxes are more complicated than a straightforward annual return, we can help you navigate this complicated area of tax law. 

Tax Professionals at Waters Hardy Can Assist  

Reach out to our team today to start the conversation and see how we can help you make quarterly taxes a seamless process that does not affect your valuable time or your bottom line.  

When you have a tax return preparation services expert in your corner, you can minimize your taxes now and well into the future while having peace of mind that you won’t be taken off guard by unexpected taxes or penalties along the way.  

Contact us today! 

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