More and more professionals are leaving the comfort of W-2 employment to strike out on their own, typically to found a small business or to become self-employed freelancers or independent contractors. Between 2020 and 2023, full-time freelancers grew by 90%, while part-timers grew by 130%, with over 60 million professionals now describing themselves as freelancers. ThereÕs speculation that 2024 will be a net growth year for freelancing, with 83% of freelance leaders feeling highly or moderately bullish about freelancingÕs short-term prospects.
While being your own boss has numerous benefits, there are also new responsibilities, many of which are unavoidable. A crucial change will be your relationship with taxes and tax filing. Unlike taxpayers who receive a W-2, you will now be responsible for accurately calculating and submitting tax payments to the IRS each quarter, which is called quarterly estimated taxes.
Accurate calculations and timely submissions aid in annual budgeting and allow you to avoid IRS penalties and scrutiny. If quarterly estimated taxes are new to you, donÕt worry. This guide will help you calculate quarterly estimated taxes for 2024 and beyond.
Quarterly Estimated Taxes: Key Takeaways
Important quarterly estimated tax takeaways from this article include:
Who should pay quarterly estimated taxes?
Freelancers, independent contractors, and others who arenÕt W-2 employees must pay quarterly estimated taxes.
When should they pay this tax?
Quarterly estimated taxes must be accurately calculated and submitted four times per year.
What's the easiest way to pay?
The easiest way to pay is by using Electronic Federal Tax Payment System (EFTPS).
What Are Estimated Taxes?
Four times per year, workers or business owners receiving tax forms other than a W-2 are expected to pay directly to the IRS. This effectively replaces the tax withholdings for many individuals by their employers.
Estimated taxes apply to any kind of taxable income that comes to you directly without any tax withholding, including:
Interest
Stock dividends
Capital gains
Any income you earn through self-employment
Different states have different quarterly estimated tax requirements and protocols. Contact your Secretary of State for more information.
Who Is Required to Pay Estimated Taxes?
Most people who arenÕt W-2 employees are required to pay estimated taxes. If youÕre operating as one of the following business entity types, you must pay estimated taxes if you expect to owe a tax bill of $1,000 or more in a fiscal year:
Sole Proprietor
LLC
Partnership LLC
S Corp
For part-time freelancers, your employer might withhold from your primary income, but perhaps youÕve made other income, too. You do not have to make estimated tax payments if your estimated tax and withholding so far will make up at least 90% of the total tax you owe for the year.
You might also use your tax return from the previous year to gauge your liability. You donÕt need to pay more in advance if you have already paid as much as the total taxes you owed last year.
However, you must pay slightly more if your income is higher. If your Adjusted Gross Income (AGI), your total income minus deductions, is over $150,000, you must have paid 110% of your previous yearÕs tax total to avoid submitting estimated taxes. If your filing status is married, but youÕre filing separately from your spouse, your taxable income must exceed $75,000 to make the higher barrier necessary.
Schedule time to learn more about 1-800AccountantÕs quarterly estimated tax and tax advisory services.
What Is the Safe Harbor Rule for Estimated Tax Payments?
Generating accurate quarterly estimated tax payment calculations can be difficult, which is why the IRS implemented a Safe Harbor provision that helps businesses and freelancers avoid underpayment penalties. The Safe Harbor rule provides a cushion for people who paid at least 90% of their bill for the previous tax year. So, if you paid 90% of your final bill in estimated taxes and made your payments on time, you would be exempt from paying a tax penalty.
Exceptions: Farmers and Fishermen
Farmers and fishermen who follow the calendar year for tax purposes (starting on January 1st) and at least two-thirds of their income in 2023 or 2024 is from farming or fishing pay once on the due date of January 15, 2025. However, if they donÕt pay enough in estimated taxes for 2024, they could be subject to a penalty.
If farmers and fishermen submit their 2024 Form 1040 by March 3, 2025, and pay all the taxes owed, then they wonÕt have to make an estimated tax payment. Farmers and fishermen who donÕt start their tax year on January 1 have two options:
Pay all estimated taxes by the 15th day after the end of the tax year.
Submit their tax returns and pay all the tax owed by the first day of the third month after the end of their tax year.
Who IsnÕt Required to Pay Estimated Taxes?
In addition to the exemptions weÕve detailed, there are other scenarios in which professionals wouldnÕt pay quarterly estimated taxes. This applies primarily to W-2 employees whose employers withhold taxes from their pay, but additional exemptions exist.
According to the IRS, if you meet all three of the following conditions, you are exempt from estimated taxes:
No tax liability for the year
You were a U.S. citizen or resident alien for the whole year
Your prior tax year covered a 12-month period
How Do I Calculate Estimated Taxes?
Calculating estimated tax payments involves three steps: calculating your taxable income based on your marital status and income; computing any credits and deductions you may be eligible for, such as child tax credits or credits for taxes already withheld; and calculating your remaining tax due.
Assess Total Taxable Income
The first step in the process is approximating how much you will make in the fiscal year or your total estimated income. You can use the full amount you expect to make in the year or the exact amount you make quarterly.
Estimating the total amount is simpler for entrepreneurs and small business owners with a steady yearly income. For freelancers with unpredictable cash flow from quarter to quarter, itÕs better to tally your actual income at the end of each quarter and pay taxes on that exact amount instead.
Consider any tax deductions you plan to claim to calculate your AGI. YouÕll pay more than required if you donÕt consider tax deductions.
Understand Taxes Owed
Once your AGI is calculated, the next step in estimating your taxes is ensuring you account for income and self-employment taxes.
Calculate your income tax by multiplying your AGI by your tax rate using your income tax bracket. Tax brackets change year-to-year, so make sure you use the correct rate.
Those who make over $400 a year must also pay self-employment taxes. The self-employment tax rate includes 2.9% for Medicare and 12.4% for Social Security.
Multiply your estimated total income (not your AGI) by 92.35% to calculate your taxable income for the self-employment tax. Then, multiply the result by 15.3% to calculate what you owe for self-employment.
Calculate Your Estimate
YouÕve calculated your estimated income, taken deductions into account, and calculated income and self-employment taxes. The final step is to add everything together and divide it into quarterly payments. If you calculate the exact amount each quarter, you can skip the division.
Income Taxes Owed + Self-Employment Taxes Owed = Total Estimated Taxes
Total Estimated Taxes/4 = Quarterly Tax Payment
If you live in a state that levies a personal income tax, youÕll need to calculate your state tax when estimating your tax payments.
Should You Pay In Equal Amounts?
Typically, itÕs easiest to pay in four equal installments when using the formula detailed above. However, there are scenarios where you may end up paying more in certain quarters than others:
Your prior year's overpayment is credited to your current year's estimated tax payments
You missed paying your first estimated payment after April 15h, when the first payment was due
You make more than expected in one quarter
How Can I Pay Estimated Taxes?
You can file using the voucher with Form 1040-ES and pay by check or online using the IRS website.
There is no fee if you pay online directly from your bank account. If you choose to pay with a credit or debit card, there are fees ranging from $2.14 to $2.50 or percentages ranging from 1.82% to 1.98% of your payment.
What Are the Due Dates for Quarterly Estimated Tax Payments?
Here are the quarterly tax filing deadlines for 2024:
When Are the Due Dates for Quarterly Estimated Tax Payments in 2024?
Estimated tax payments are due to the IRS once per quarter of the financial year.
Here are the 2023 tax quarter deadlines:
Tax Quarter Quarter Dates Deadline
Q1 January 1 Ð March 31, 2024 April 18, 2024
Q2 April 1 Ð May 31, 2024 June 15, 2024
Q3 June 1 Ð August 31, 2024 September 16, 2024
Q4 September 1 Ð December 31, 2024 January 15, 2025
If your earnings predictions are reliable, you can pay your estimates early by combing them. Refer to IRS Form 1040-ES for an explanation of estimated tax requirements for individuals.
What Is the Penalty for Not Paying Quarterly Taxes?
Missing a quarterly tax payment deadline could lead to extra costs and fees. When you realize youÕve missed a deadline, you should pay your quarterly taxes immediately rather than waiting for the next payment cycle. The IRS implements penalties for late or underpayments, which are applied when filing your annual tax return.
The IRSÕs penalties are based on how much youÕve underpaid and the lateness of your payment. This penalty is added to what you owe when you file your annual tax return, increasing your businessÕs total tax liability. The IRS prefers to receive your owed taxes quarterly rather than a lump sum at the end of the year, and even a minor delay by a day can trigger a penalty.
Understanding tax obligations can be challenging and stressful. Nevertheless, making on-time and sufficient payments throughout the year is crucial. It allows you to avoid the penalties associated with not paying quarterly taxes and prevents further distractions.
How to Make Quarterly Estimated Taxes Easier
Quarterly estimated taxes can aid in generating the insights you need to help your business grow, but it can take time and effort. ThatÕs why so many small business owners, entrepreneurs, and self-employed individuals trust 1-800Accountant, AmericaÕs leading virtual accounting firm for small businesses, to handle their quarterly estimated taxes.
Whether itÕs small business tax preparation, tax advisory, income tax services, or any of our professional accounting services, we have an affordable solution to help your business stay compliant. Schedule a quick consultation Ð usually 30 minutes or less Ð to learn how we can help.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.
