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By Gayle Sato and Evelyn Waugh
If you're self-employed, own a small business, work as a freelancer or have a profitable side hustle, you may be required to make quarterly estimated tax payments to the IRS. Making payments online is the fastest, easiest way to pay quarterly taxes. If you prefer, you can also make payments by mail.
To avoid any tax penalties, take time to learn how much you'll need to pay in quarterly taxes, when quarterly tax payments are due and how to make your payments to the IRS. Here's how to pay quarterly taxes.
1. Determine if You Need to Pay Quarterly Taxes
If you're a small business owner, a freelancer, a contractor or a moonlighter, you'll likely owe quarterly taxes. Investors with sizable capital gains may also have to pay quarterly taxes.
According to the IRS, if you expect to owe a tax bill of at least $1,000 for the tax year, you must make estimated quarterly tax payments. This doesn't include income tax that is withheld by your employer if you also have a salaried or hourly position. You'll also subtract any refundable credits (such as the earned income tax credit) when determining if your tax obligation meets the $1,000 threshold.
If you underpay in a given quarter, you could be charged a penalty. This is true even if you're due a tax refund when you file your annual return. More on this later.
2. Calculate Your Estimated Quarterly Tax Payment
There are a couple of ways to calculate your estimated quarterly tax payments. The method you should use depends on the regularity of your self-employment income.
The Regular Installment Method
With the regular installment method, you estimate your total income, adjustments, deductions and credits for the full year to come up with a reasonable estimate of your total annual tax bill.
Next, you divide this number by four to come up with four equal payments and pay each installment by the quarterly deadline.
Use IRS Form 1040-ES to figure your estimated taxes. Any changes to your income may require refiguring your estimated tax for the year and adjusting your payments accordingly.
If you use the regular installment method, you'll need to ensure you're paying enough each quarter to avoid a penalty. For this reason, you should only use the regular installment method if you have a stable, reliable income.
The Annualized Income Installment Method
If your income from self-employment fluctuates, such as if you're the owner of a seasonal business or a freelancer with a varying roster of clients, your quarterly taxes can vary too. The annualized income installment method can help you estimate your taxes with more accuracy than the regular installment method.
Using the annualized income installment method, you'll estimate your actual income, expenses and deductions each quarter to determine your tax liability, rather than dividing your entire year's income by four and paying in standard installments. This can help make paying taxes more affordable when your earnings are lower.
Follow the instructions in IRS Form 1040-ES for calculating your quarterly estimated tax payments. The form will walk you through determining your income tax, as well as self-employment tax, which covers Social Security and Medicare.
Alternatively, consider using tax software or working with a tax professional to make paying quarterly taxes easier.
How to Calculate Your Net Income Each Quarter
To determine your quarterly estimated tax payments, you'll need to know how much you made in net income. To find your net income, start with your gross income—your actual earnings—and subtract your deductible expenses.
To determine your net income for a full quarter, add up all your income for the months in that quarter and then subtract all your deductible expenses for the quarter.
Example: Maria, a freelance web designer, is preparing to pay the first quarter's taxes due in April. She tracks her income and expenses in a spreadsheet. Her income for January, February and March is:
- January: $4,500
- February: $5,000
- March: $4,000
She adds her income from each month to get a gross income of $13,500 for the quarter.
Her expenses include invoicing fees, software subscriptions, web hosting and a coding course she took to improve her business; these add up to a total of $350 for the three months.
To find her net income, Maria subtracts her expenses from her gross income:
- Net income for the first quarter: $13,500 - $350 = $13,150
3. Know the Quarterly Tax Due Dates
To avoid a penalty for underpaying or missing a payment, be sure to pay estimated taxes by each year's quarterly tax deadline:
|2022 Quarterly Estimated Tax Due Dates|
|First Quarterly Payment|
(January 1 - March 31)
|April 18, 2022|
|Second Quarterly Payment|
(April 1 - May 31)
|June 15, 2022|
|Third Quarterly Payment|
(June 1 - August 31)
|September 15, 2022|
|Fourth Quarterly Payment|
(September 1 - December 31)
|January 17, 2023|
How to Avoid Underpayment Penalties
The key is to estimate your tax bill accurately, then make sure your estimated payments fully cover your taxes for the quarter. Of course, they're called estimated taxes for a reason: Your calculations may differ from your final bill. You can build in some protection by meeting IRS safe harbor requirements. If your total withholding and current-year estimated tax payments equal one of the following, you typically won't be charged an underpayment penalty:
- 100% of your previous year's taxes (or 110% if your adjusted gross income was more than $150,000, or $75,000 if married filing separately)
- At least 90% of your total tax bill for the current year
- No more than $999 short of your total tax bill
Penalties may also be waived if you failed to make estimates because of a casualty, disaster, retirement (at age 62 or later) or disability that occurred in the past year.
What if you unexpectedly make more income this quarter—or this year? If business is booming or you cashed in assets for a large gain, use the worksheet on Form 1040-ES or consult your tax pro for advice on increasing your estimates. The reverse may be true if your income unexpectedly drops: You may want to recalibrate your estimates to reflect your actual inflow. Some freelancers and other self-employed earners choose to make monthly payments to the IRS to make budgeting easier.
4. Pay Quarterly Taxes Using One of These Methods
After you've calculated what you owe for a given quarter, you have options for how to pay your quarterly taxes. You can:
- Pay with a debit card, credit card or digital wallet via the IRS payment site.
- Make a payment via the Electronic Federal Tax Payment System. You'll receive a documented proof of payment and confirmation number when your payment processes.
- Pay with a check or money order through the mail. You'll send your payment to the IRS with Form 1040-ES.
Get Organized and Make a Plan
Paying estimated taxes can seem daunting, especially for the newly self-employed, but paying on time can be manageable if you stay organized. Make sure to mark each estimated tax due date down, keep records of your income and expenses, save your receipts and budget for taxes. You might choose to direct a portion of each paycheck directly into a separate checking or savings account to avoid any temptation to spend the cash you'll owe in taxes. Though making quarterly payments isn't fun, it's often easier to digest than a single large payment plus penalties at the end of the year. In that way, estimated tax payments can actually be a benefit.
Many freelancers and self-employed workers use tax filing software to make the job easier. Alternatively, many outsource some of the work to a bookkeeper or work with a tax professional to ensure they've claimed the maximum possible deductions and filed their taxes accurately.