As the IRS puts it:
The United States income tax is a pay-as-you-go tax.
This means as you earn income, you must pay tax on it.
Unfortunately, you can't just wait until you file your income tax to pay it all at once. The government makes it pretty easy for traditionally employed workers to pay as they go by requiring that employers deduct income and payroll taxes directly from their paychecks.
Independent contractors and business owners, however, have to send in these taxes on a regular basis. Usually, they send them quarterly, but they can send them monthly.
If you don't pay enough during the tax year, you may owe a penalty when you file your income taxes. According to the IRS:
[M]ost taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or 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.
If you're an independent contractor who pays quarterly estimated taxes, you are sending money to the federal government and possibly your state government at least four times a year.
You may be writing checks or if you'd like to send the money electronically, you can use the government's EFTPS system to send payments electronically.
When Estimated Taxes Are Due
The exact dates that estimated taxes vary slightly from year to year because if the typical date falls on a Saturday or Sunday, the Federal government's deadline is moved to the following Monday.
In general, the deadlines are:
- April 15 (1st quarter)
- June 15 (2nd quarter)
- September 15 (3rd quarter)
- January 15 (previous year's 4th quarter)
If you are in Texas or another area where FEMA issued a disaster declaration due to winter storms in 2021, the IRS has extended the filing and payment deadlines for first-quarter estimated taxes from April 15, 2021 to June 15, 2021.
How Much Should I Pay in Estimated Taxes?
This is a complicated question because everyone's tax situation varies. The simplest way to figure it is to take what you owed in taxes last year, divide it by four and make payments of that amount.
If your income is likely to change between years, however, using this system could mean you end up paying too much or too little. Keeping a close account of your income and adjusting your tax payments accordingly can help you avoid a penalty.
You will need to make payments on your net profit, which is your income minus deductions and business expenses. Your payments will need to cover:
- Your business income tax
- Your self-employment tax (Medicare/Social Security taxes)
When tax planning, it is just as important to make a plan not only for what you must pay but for how you intend to save the money to pay those taxes. You'll want to avoid emptying your savings accounts or, worse, incurring debt.
These 4 tips on saving for taxes could prevent you from owing a penalty or at least reduce your stress at tax time by eliminating unpleasant surprises.
The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.