Quarterly Taxes: What They Are and Who Needs to Pay Them?

Quarterly taxes are proactive payments typically made by those who earn income but don’t have taxes withheld from their paychecks by employers. Instead of a single tax bill at the end of the year, these individuals and businesses pay estimates throughout the year in the spirit of the “pay as you go” U.S. tax system.

This article will teach you exactly what quarterly taxes are and who has to pay them. Then, we’ll go through the key details you need to know, such as what the deadlines are, how to calculate these taxes, and how to pay them. We’ll also give you some tips on handling quarterly taxes and explain what happens if you fail to do so.

What Are Quarterly Taxes?

Quarterly taxes are officially called estimated taxes, and are generally paid by those who make income but don’t pay tax through withholding. That way, instead of paying a lump sum at the end of the year, individuals and entities that are required to pay estimated quarterly taxes do so in four installments instead.

The core components of quarterly taxes include:

• Income tax, which is the standard federal (and sometimes state) tax calculated based on your income bracket.
• Self-employment tax, which encompasses Social Security and Medicare taxes, amounts to 15.3% of your net earnings.

W-2 employees will have these taxes automatically withheld from their paychecks every pay period (and pay half of Social Security and Medicare for you). However, when there’s no employer to withhold taxes on your behalf, you must estimate and remit these taxes yourself.

Note that even W-2 employees may have to pay quarterly taxes if they earn significant income without withholding.

Some of the general rules to keep in mind regarding quarterly taxes include the following:

• Payments are made based on your estimated annual earnings, since you typically don’t know in advance how much you’ll make.

• You need to pay this tax if you’re expected to owe at least $1,000 after credits and withholding.

• You can avoid penalties with the safe harbor rule (if you paid at least 90% of the current year’s tax liability or 100% of last year’s tax).

Who Has to Pay Quarterly Taxes?

In general, individuals and entities who are expected to owe taxes on earned income after subtracting all credits and standard withholdings are required to pay quarterly taxes. Let’s see the most common groups that must pay estimated taxes:

#1. Self-Employed Individuals

Self-employed individuals (e.g., freelancers and independent contractors) are one of the biggest groups of professionals who need to make estimated tax payments to the IRS. Since they don’t have employers to withhold taxes from their paychecks, it’s their responsibility to take care of their entire tax burden.

As a general rule, if your net earnings from self-employment are at least $400 in a year, you must pay self-employment tax. Following that, if your total expected liability is $1,000 or more, you’re required to pay quarterly taxes.

#2. Small Business Owners

Small business owners' tax obligations vary based on the structure. Owners of sole proprietorships and LLCs, as well as partners in partnerships, often make a pass-through income for which they have to make quarterly payments.

Just like the income of self-employed individuals, the earnings of these professionals also aren’t subject to tax withholding, leaving the owner responsible for remitting taxes quarterly. As a result, owners are typically required to estimate annual profits and pay taxes based on these calculations.

Owners of S corporations, however, need to be careful when taking W-2 salaries and owner draws. In these situations, they may have to pay quarterly taxes even with salary withholdings.

#3. People With Other Untaxed Income

You don’t have to be a business owner or a freelancer to pay quarterly taxes. People may have to pay estimated taxes on other untaxed income, such as:

• Rental income
• Interest and dividends
• Capital gains
• Alimony

Even W-2 employees may be required to pay quarterly taxes if withholding from their regular jobs doesn’t cover their full tax liability. However, they can increase optional withholding to account for extra income outside their regular job and avoid having to make estimated payments.

What Are The Deadlines For Quarterly Taxes?

There are four quarterly tax deadlines, and they are:

• April 15, for the income earned in the first quarter (Q1), between January 1 and March 31.

• June 15, for the income earned in the second quarter (Q2), between April 1 and May 31.

• September 15, for the income earned in the third quarter (Q3), between June 1 and August 31.

• January 15 (of the following year), for the income earned in the fourth quarter (Q4), between September 1 and December 31.

If any of these dates fall on a Saturday, Sunday, or a federal holiday, you can make the payment on the first following business day and still be on time. Note that the IRS divides the tax year into payment periods that don’t align with standard calendar quarters; that’s why these “quarters” don’t always align with traditional three-month calendar ones.

Here are a few important considerations to have in mind:

• You can skip the January 15 deadline if you file your Form 1040 and pay the full balance by January 31.

• Late or missed quarterly payments may incur penalties, even if you make up for underpayment in the following quarter.

• Farmers and fishermen may be exempt from making quarterly tax payments if at least two-thirds of their gross income comes from farming or fishing activities. In this case, they can skip quarterly payments and pay all estimated taxes in full by January 15. They can further postpone this date until March 1 by filing Form 1040 or 1040-SR.

• If you have fluctuating income (e.g., seasonal work), you can use the annualized income installment method to avoid underpaying.

How to Calculate Quarterly Taxes in 5 Steps

Let’s show you how to calculate estimated taxes in five simple steps:

1. Estimate your total annual income. This includes your total expected gross earnings, encompassing business and freelance income, investment income, rental income, and more. If you expect growth, do your best to make an accurate prediction based on your current situation and historical earnings.
   
   
2. Deduct your expenses. Subtract the business expenses you expect to have from your projected annual income to find out your net taxable income. Common deductions include home office deductions, costs of subscriptions and professional services, travel costs, etc.
   
   
3. Estimate your tax liability. Use your taxable income with federal tax brackets to determine your income tax. Following that, calculate the self-employment tax, which is 15.3% of your net earnings. Add these together to determine your total projected tax liability.
   
   
4. Apply credits and withholding. If you’re eligible for tax credits or have estimated withholding, subtract it from your tax liability. This will give you the total amount that you owe in quarterly taxes.
   
   
5. Divide the sum into quarterly payments. Divide the final figure into four payments to determine how much you have to pay on each of the quarterly tax dates.

Here’s a brief example of this method:

• Estimating total annual income: $80,000
• Deducting expenses: $80,000 - $20,000 = $60,000
• Estimating tax liability:
  • Income tax: ~$7,500
  • Self-employment tax: $9,180
  • Total tax liability: ~$16,680
• Applying credits and withholding: $16,680 - $2,000 (example credit) = $14,680
• Dividing into quarterly payments: $14,680 / 4 = $3,670

Using this example, the person would pay $3,670 each time when quarterly taxes are due.

If you expect income volatility, you can use the annualized method by submitting Form 2210. This allows you to pay quarterly tax estimates in unequal installments without risking underpayment.

How Can You Pay Quarterly Taxes?

You can pay quarterly taxes in multiple ways, but the IRS recommends paying estimated taxes online, as it’s a convenient and secure method. If you opt for this, you can use one of the following options:

• Via your IRS account. Using your account at IRS.gov/Account allows you to access your pay history and other important data, in addition to paying quarterly taxes.

• Using IRS Direct Pay. Go to IRS.gov/Payments to transfer funds directly from your checking or savings account.

• With a debit or credit card or a digital wallet. You can also use a card or a digital wallet at IRS.gov/Payments, but keep in mind that the service provider will likely charge you a fee.

• Using Electronic Funds Withdrawal (EFW). The EFW method is an integrated option for those who use electronic filing.

• With an Online Payment Agreement (OPA). OPA allows you to apply for multiple installments when you can’t pay your taxes in full by the due date.

You can also pay quarterly taxes using other methods, such as:

• Phone:
  • Call one of the IRS service providers to pay via debit or credit card.
  • Use the Electronic Federal Tax Payment System (EFTPS) to pay from your checking or savings account.
• IRS2Go app.
• Cash, at one of the IRS retail partners or the IRS Taxpayer Assistance Center (TAC).
• Check or money order, using the Estimated Tax Payment Voucher (Form 1040-ES).

What Happens If You Don’t Pay Quarterly Taxes?

If you don’t pay quarterly taxes (or if you significantly underpay them), you will face financial penalties with interest. The severity of a penalty primarily depends on how much you underpaid and how late you were.

Here are the most common consequences of not paying quarterly taxes:

• Underpayment penalty. Even if you pay quarterly taxes on time but significantly underestimate your liability, you’ll be charged with the underpayment penalty. The penalty typically scales with the amount underpaid and duration.

• Interest charges. Penalties for unpaid or underpaid taxes are subject to interest, which accrues daily. The longer you wait to pay the fine, the more expensive your penalty gets.

• Failure to file penalty. If you don’t file your tax return by the April deadline, you will face a serious penalty of 5% of the tax owed for each month you’re late. The penalty goes up to 25%, making it essential to file for an extension if you have justifiable reasons.

Apart from direct financial consequences, you may face additional problems, like:

• Cash flow issues. Waiting for the end of the year will result in a large tax bill that you will have to pay at once. Even if you have enough money for it, it can still put a significant strain on your finances.

• Potential audits. Repeated offenses may result in more scrutiny from the IRS and trigger audits.

Quarterly Taxes for Freelancers and Gig Workers

Freelancers, gig workers, and independent contractors are among the most affected by quarterly taxes, and they can face various unique challenges due to the nature of their work and income.

If you’re one of these professionals, you’re classified as a 1099 worker and not a W-2 employee. This means you’re operating your own business (whether you’re a freelance writer, an Uber driver, or an Etsy seller) and are subject to the full 15.3% self-employment tax on top of regular income taxes.

Another big obstacle for freelancers and gig workers can be their fluctuating income. If earnings vary a lot between different quarters, it can be difficult to estimate tax liability. Plus, paying quarterly taxes for self-employed professionals can be a challenge during lean quarters.

To solve this, many freelancers use the annualized income installment method. By completing and submitting Schedule AI (Form 2210), used for the annualized income installment method. This lets them estimate different tax liabilities each quarter, depending on their earnings for that period.

On the practical side, freelancers and gig workers always need to be on top of their finances. For example, by meticulously tracking expenses and keeping receipts, you’ll be able to take full advantage of business deductions.

On the other hand, setting some money aside for taxes (e.g., 25-30% of earnings) can help you meet deadlines and pay self-employment quarterly taxes with no effort.

3 Valuable Tips For Managing Quarterly Taxes

Before we conclude the article, we’ve prepared three useful tips and strategies that can help you manage quarterly taxes and avoid making costly mistakes:

• Create a dedicated tax savings account. Separate your tax money from your operating capital by putting it into a separate account. Every time a client pays you, you can take 25-30% and put it into a savings account reserved for taxes to ensure you can always fulfill your obligations.

• Maintain clean and accurate records. Properly tracking income and expenses is mandatory for accurate quarterly tax estimation. For instance, our invoice generator can help you bill clients professionally and track their payments, while the Form 1099 generator can help you track payments to other contractors.

• Set early calendar reminders. Don’t wait for the deadline to calculate your quarterly tax payment. Set a reminder a week or two before each deadline to make sure you have enough time to run your numbers and collect the funds.

Final Thoughts

Quarterly taxes are one of the core elements of the tax system and a reality for freelancers, gig workers, and small business owners. While the process of estimating your income and taxes to try to determine quarterly payments can seem daunting at first, with a timely and proactive approach, the process is easily manageable.

Remember to keep an eye out for the deadlines, to keep track of your expenses for deduction purposes, and to always set aside a portion of your income for quarterly taxes. And don’t forget to check out our document generators if you need help with billing clients, recording payments, and managing finances.

Quarterly Taxes FAQs

#1. How much do I need to earn before paying quarterly taxes?

You need to earn enough income that you’re expected to owe $1,000 in taxes at the end of the year, after tax credits and regular withholdings. This rule applies regardless of your total income (which is especially important for W-2 employees who earn money outside their regular job).

#2. Can I skip a quarterly payment?

You can skip a quarterly payment if you earned no income and thus don’t owe any taxes for that period, or if you meet safe harbor rules. Skipping payments without a justified reason will likely result in underpayment penalties, even if you pay the skipped amount in the next quarter.

#3. Can I pay all estimated taxes at once?

You can pay all estimated taxes at once, but you should do so early in the year. If you wait for one of the later periods and skip a quarter or two, you may incur underpayment penalties unless you meet safe harbor requirements.