Many taxpayers assume that they only need to worry about taxes once a year, but some are required to pay estimated quarterly taxes. If you fall into this category, and you fail to pay them, you could face stiff penalties. It is a good idea to see if you are required to pay quarterly taxes and how to do it. 

Who Needs to Pay Quarterly Taxes?

Workers who receive a W-2 pay a portion of each paycheck to Federal Taxes. The IRS requires regular payments throughout the year for wage earners. Many who are self-employed or have other income, such as alimony, dividends, capital gains, prizes, or awards are also expected to make regular quarterly payments to the IRS. If you fall into this category and you do not make the required payments, then you could face penalties or interest. 

Those who are sole proprietors, partners, or shareholders in an S corporation typically expect to owe more than $1,000 when the return is filed. If you recently started a self-employed business, then it is a good idea to see if you are required to file quarterly taxes. 

Exclusions and Exemptions

Even if you fall into a category where you would be required to file quarterly estimated taxes, the IRS has a few exclusions to this rule. To be excluded, you must meet all three of the criteria to avoid filing quarterly taxes. 

  • You owed no taxes in the previous year.
  • You were a U.S. resident or citizen the entire year.
  • Last year’s taxes covered all 12 months of the year.

What Are Underpayment Penalties?

You are expected to pay at least 90% of next year’s taxes or 100% of the previous year’s bill. If your adjusted gross income is over $150,000, you will need to pay 110%. If you are not caught up by April, then you could face a larger tax bill and underpayment penalties. 

When Are Estimated Taxes Due?

Estimated taxes are due four times a year, April 15, June 15, September 15, and January 15. On each filing date, you pay taxes for the previous quarter’s earnings. For instance, on April 15, you pay for any earnings for the first quarter of the year. June 15, you pay any taxes for the second quarter of the year, etc.

Some taxpayers might benefit from paying their final quarter’s taxes before December 31 of the previous year. If the 15th is on a weekend or federal holiday, the deadline is moved to the next business day. 

Estimation and Penalties

You can estimate the quarterly taxes you owe by using and submitting IRS form 1040-ES. This form asks you to estimate your expected income for the quarter. If you underestimate the amount, you could own penalties and interest. The IRS will return the difference of any overestimate to you when you fill out your yearly tax return on April 15. 

If you owe penalties or have underpaid your taxes, the IRS will send you a notice. Those who owe less than $1,000 will not have to file estimated taxes or pay a penalty. If you pay at least 90% of your estimated taxes by the deadline, you will not owe a penalty if you make under $150,000. 

Special Situations

If you have seasonal income, you will not have to file or pay estimated taxes until you have earned income. You can pay either the entire amount owed by September 15, or you can split it into two payments. Farmers and fishermen only have to file once a year. They must file by March 1. 

If you pay all the taxes you owe at that time, you will not face a penalty. Paying less than the amount owed could result in a penalty for the entire tax year. For this rule to apply, you must earn at least two-thirds of your income through these means. 

The gig economy means that many are finding self-employment opportunities, either as a main source of income or in addition to their W-2 job. This means more people now have to file quarterly estimated taxes than in the past. If you have recently entered the gig economy, then it is important to find out if you must file quarterly taxes. When in doubt, it is a good idea to find a qualified tax professional who can help.

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