Estimated Quarterly Taxes: The Ultimate Guide

Estimated Quarterly taxes are nothing but “estimated Periodic advance payment of taxes” imposed by Internal Revenue Service (IRS) of the United States. These taxes are calculated based on the total amount of income that you earn for the quarter and the amount of income you are estimating for the year.

Estimated quarterly taxes are calculated on income that is not subject to any type of withholding and includes self-employment income, dividend income, rental income, interest income and capital gains. These estimated taxes are generally paid on quarterly basis and thus are popularly known as “Quarterly Payable Taxes”

 

Do you need to pay Estimated Quarterly taxes?

 

The rule of quarterly tax payment is applicable to all below people:

  • S. citizens and resident aliens;
  • Residents of Puerto Rico, the U.S. Virgin Islands, Guam, the Commonwealth of the Northern Mariana Islands, and American Samoa; and
  • Nonresident aliens (use Form 1040-ES (NR)).

The quarterly tax payment requirement for an individual as below:

  • Every individual who is a year earns income and is expected to owe $1,000 or more in tax after subtracting their withholding and refundable tax credits are expected to calculate and pay the quarterly taxes to IRS.
  • Also, quarterly taxes are to be calculated and paid if you expect your withholding and refundable tax credits would be lower of the below two option:
    • 90% of the tax to be shown on your current year’s tax return, or
    • 100% of the tax shown on your prior year’s tax returns.

Note:  Every profit-making self-employed personnel and/or sole-proprietor business owners always have to calculate and pay estimated quarterly taxes. These people need to pay the quarterly return if their business loses money or working under loss.

  • In addition to the above conditions, every person who is a partner in a business or is a corporation or is an S Corporation, have to calculate and pay quarterly taxes if they expect to have $500 or more in tax liability for the year.

 

Employees’ taxation calculation and payment are generally taken care by employer side. If you are not an employee and work on your own (Self-employed), you will pay taxes a little differently than employees do.

Being a self-employed personnel you are required to pay these taxes on your own, either through quarterly estimated tax payments or when you file your tax return at the end of the year.

The below points will provide you details of IRS quarterly taxes calculation, payment and filing by self-employed individuals (either Independent Contractor and/or Businessman)

 

How to calculate estimated quarterly taxes?

 

IRS requires every tax-payer to pay four estimated tax payments instalments in a year based on your total estimated income and respective tax payment on the same.

For computing your IRS quarterly payment, you must estimate your total income for the year: The total income for the year includes adjusted gross income, taxable income, taxes, deductions, and credits if any available for the calendar year.Based on this estimated total income you are supposed to pay your quarterly taxes.

 

Pointer to easily calculate your taxes:

  1. Refer your previous year tax return so as not to miss any income while estimating your total income for the current year.
  2. Also, keep in mind the tax payment you already owe to IRS before deciding the amount of tax payment for current year and current quarter. Always adjust excess or short payment taxes within quarters to avoid wrong payment and miscalculation of taxes.
  3. Don’t forget to revise your estimated income calculation and tax payment amount thereon, based on the current situation of your income. (In simple terms, if your income turns out to be significantly lower than the previous year’s, then your estimated payments must be adjusted to be lower to match the currently estimated income calculation accordingly).
  4. You can always refer “Form 1040-ES”; it has a worksheet attached to it which can help you calculate your estimated income and thereafter the tax payment to be made for each respective quarter.

 

Note: Nowadays there are many online tools and applications which can help you calculate the taxes in simpler terms.

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How to pay estimated taxes?

The below are a few recognized method of payment of estimated quarterly tax to IRS:

Pay by Check or Money Order:

 

You can write a cheque or issue a demand draft and attach the same with your income tax return and send it to IRS.

Steps adopted to make such payment are:

Step 1: Visit IRS website and take a printout of Form 1040ES

Step 2: In Form 1040 ES, if you scroll down to the bottom you will get the estimated tax payment vouchers.

Step 3: Write out your cheque payable to United States Treasury for the amount of your calculated estimated taxes. Note: Make sure you include your Social Security or Tax ID and current tax year in the form correctly.

Note: It’s always better to send the voucher and payment using a tracking number so as it is not misplaced or lost.

Pay by Direct Debit:

Direct Pay is the easiest way to pay your taxes wherein you directly pay on the IRS.gov website. This is one of the easiest ways to pay estimated taxes online.

Steps for making payment through Direct Pay:

Step 1: Visit IRS website and register yourself for the payment option.

Step 2: For registering it requires: name, address, Social Security number, filing status, the tax year for payment and the reason for payment.

Step 3:  Once all details are confirmed and completed then submit for payment.

Pay by Debit or Credit Card

  • IRS2Go (mobile application): A new mobile application is introduced by IRS which have a direct access to Direct Pay or Pay By Card process, which enable an individual to may payment through a mobile application.
  • Set-Up an Installment Plan: Under this scheme, you can opt for an Online Payment Agreement with IRS. Under this scheme, you would be paying your tax balance in instalments over the period of time. (Note: There would be interest levied on the unpaid balance, however, you will not be considered in default.)
  • Pay by Phone: A new process of payment through the phone was introduced which provides another safe and secure method of paying electronically. For availing the phone payment service you may follow either of the 2 options:
    • call one of the debit or credit card service providers or
    • Call the Electronic Federal Tax Payment System (EFTPS).

Note: These are chargeable services and each service provider may charge a fee. The amount of service fee may vary for each provider, card type and payment amount.

 

Steps for making payment through EFTPS:

Step 1: Visit IRS website and register yourself under EFTPS option.

Step 2: Once registered, IRS authority will mail you the confirmation of registration and PIN within 10 days.

Step 3: You have to set up the payment details for payment details. There is no need to key in all the details each time but you can set up recurring payments for estimated taxes and payroll taxes.

Step 4: For next time, you can log in and make any payment.

 

  • Pay by Settlement: If you can prove that the tax payment causes extraordinary hardship to pay, you can request IRS to accept the offer to make a settlement. Under this scheme of payment, you can offer to pay a portion of your taxes immediately and the IRS agrees to drop the rest depending on the case.Note: There is a lot of paperwork involved in claiming such benefit and such order for such settlement to be approved.
  • You can pay your tax liability by phone or online (refer to Form 1040-ES instructions, pg 3)
  • You can pay your tax amount via electronic funds withdrawal with your previous year e-filed return.
  • You can always adjust an overpayment made by you on the previous tax return and adjust the same with current year tax payment.
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Consequences of non-payment

 

In case you don’t make the required payment of taxes on defined dates, then you may have to pay a penalty for such a default. In case of any misses in payment or payment was made of a lower amount than what should be paid, then a penalty would be imposed.

On a general basis, the interest penalty is calculated as below:

  • The amount would be the difference between the amount you should have paid in for each instalment and the amount you actually paid for each payment.
  • The period would be the total number of days for which the amount remaining unpaid.

The penalty rate of interest is set by the IRS each year. Currently, the rate is 0.5% of the pending tax to be paid for each defaulted month or a part of the month. The rate of penalty interest may go up to 25% wherein IRS deems fit and necessary. (Note: You won’t have to pay the penalty if you can show reasonable cause for the failure to pay on time._

If the penalty and tax are not paid within 10 days from IRS final notice, then the interest of penalty is raised from 0.5% rate to 1% per month.

The penalty rate is 0.25% for each month or part of a month where the employee opts for tax payment in the instalment agreement.

 

 

Quarterly taxes form:

All Individual taxpayers’ use: Form 1040-ES to calculate and pay your estimated quarterly tax each year.

Where Non-resident tax-payer you are liable to pay taxes for the year should useForm 1040-ES (NR) for calculating and paying estimated quarterly tax each year.

Please find the link to the forms here.

 

 

Due Dates for payment of quarterly taxes

The dates for making estimated quarterly payment are shown below.

Payment Quarter Due Date
1st payment January – March 15th April
2nd payment April – June 15th June
3rd payment July – September 15th September
4th payment October – December 15th January of the following year
Final IRS tax return January – December 31st January

 

Note: In cases wherein IRS deems fit and necessary, the due date can be changed or extended by the period as notified by the department.

 

Steps to pay quarterly taxes

 

The below is the detailed step of making quarterly tax payment and filing your tax returns:

  1. Determine Your status:   The IRS requires every individual to determine their tax classification. You need to identify your status as per below: whether you are a sole proprietor or you work as an independent contractor or are you a partner in a trade or business
  1. Collect your earning details and properly based on probable future of your business and you estimate the total income for the year. For determining the estimated total income you can follow the above-mentioned steps as already discussed with.You need to revise the income calculation based on actual data you keep receiving on monthly basis.
  2. Plan your tax-deductible expenses for the year: so as to claim a reduction in the amount of total tax to be paid.
  3. Pay your taxes based on all your collected inputs. You can pay your taxes by a mode as discussed
  4. Use the correct tax form for paying and filing your quarterly returns.
  5. Complete and Submit: Once all details are collected, taxes are paid, complete your tax return file and submit.

 

Illustration:

Mr Joseph is a self-employed person; He has a total estimated income of $4000. This total estimated was arrived after considering past and the current position of taxes.

For calculating his tax liability values,

Step1: To arrive at effectively self-employment taxable income: He has to multiply his taxable income by 92.5%.

Step2: Then to calculate tax liability, he will multiply current self-employment tax rate to that income.

Step 3: The amount of tax arrived would be divided by four to arrive at the estimated quarterly tax.

Step 4: You must select the appropriate payment mode and make the payment within respective due dates for the quarter.

 

QuickBooks & Quarterly tax payment:

There are many cloud based accounting software’s which help you to calculate your estimated income and respective taxes for you. Accounting software’s like QuickBooks who have an inbuilt system to appropriately calculate your income and help the whole estimation process.

QuickBooks accounting software is a very effective tool which can help you and your CPA with database and detailed summary of your accounts in a go which will enable you to make proper payment and mitigate the risk of penalties and prosecution.

 

Quarterly taxes are an important government payment requirement for each and every income earner in the US. The above summary article provides you with a very detailed procedure –policies and regulations for calculating and paying your tax dues to IRS. It’s always better to prepare in advance rather than bear penalties and prosecution. Be informed and be compliant.

 

 

2017-11-17T11:45:53+00:00

About the Author:

Hi, I am Tarannum. I am CA and working in accounting for 10 years. You can subscribe to my blog or join us on facebook.