This post was originally published on Jan. 8, 2015, and was updated on March 5, 2018, Jan. 17, 2019, and Jan. 30, 2020.
When I first started my business, I was naïve about a lot of things. I treated colleagues like competition, didn’t require clients to sign contracts, and charged way too little. But I was by and far the most naïve about taxes. Quarterly estimated taxes? What are those?!
For one, I didn’t get that I was supposed to pay my taxes four times per year.
Wait. What? If you just did a double take, don’t worry. Many of us have been there before you. We get so caught up in creating our first invoice or picking a logo that we don’t find out that the IRS wants to hear from small business owners quite a bit more frequently than just on April 15. These little check-ins are known as your “quarterly estimated taxes.”
Why quarterly estimated taxes?
The United States operates on a pay-as-you-go tax system. This is why employers are required to withhold taxes from the paychecks of their W-2 employees. (I still remember the injustice of receiving my first paycheck at age 15 and realizing my money had been handed off to mysterious places like “Federal,” “State” and “FICA.”)
But if you’re self-employed, no employer is withholding and remitting those taxes to the government — which means that you’re responsible for that task.
You are required to remit taxes to the government quarterly.
Essentially, quarterly estimated taxes are designed so that you pay one-quarter of your annual tax bill each quarter on April 15, June 15, September 15 and January 15 (or the next business day if that date falls on a weekend or holiday). For example, if you will owe $10,000 in taxes at the end of the year on April 15, you should pay $2,500 on each of those four dates.
Of course, the big question is, how do you know how well your business is going to do and how much you will have to pay? Well, that’s why these are “quarterly estimated taxes” and not “quarterly precise taxes.”
Now, breathe a little.
If this is your first year paying taxes as a self-employed individual, you will not be penalized as long as you pay in an amount equal to what you owed in taxes in the previous year.
Related: Calculating self-employment taxes
How much do I owe?
This is where good bookkeeping comes in. In order to pay your taxes every quarter, you need to know how much is coming in and going out from your business. If you don’t, you could wildly overpay or underpay the tax collector. If you overpay, you miss out on money that could have been working for you. If you underpay, the IRS will charge you a penalty at the end of the year.
But keep in mind that GoDaddy Online Bookkeeping gives you a conservative estimate and does not take into account any other personal deductions (child credits, education credits, etc.) or taxes withheld by a W-2 position you might concurrently hold while you are self-employed.
Some people who work full- or part-time while they are self-employed get lucky — the taxes withheld by their employer are enough to cover their entire tax liability, thus they do not have to file quarterly estimated taxes because their employer is paying enough money into the treasury on their behalf. If you file jointly with your spouse, your spouse’s income tax withholding might cover the amount you owe.
Using GoDaddy Online Bookkeeping to help calculate quarterly estimated taxes
If you need to pay quarterly estimated taxes, though, check the “Taxes” tab in GoDaddy Online Bookkeeping then the “Estimated Taxes” sub-tab. This will allow you to see how much GoDaddy Online Bookkeeping has estimated you owe the government.
Once you’ve entered a payment to the IRS, your quarterly estimated taxes payment will show up in your “Money Out” tab as “Estimated and Income Tax Payments.”
Please note that if you live in a state with an income tax, you might also be required to pay quarterly estimated taxes to your state.
How do I file quarterly estimated taxes?
To pay your estimated quarterly taxes you can do one of two things:
- You can fill out a form 1040-ES and mail it in.
- You can file electronically using the Electronic Federal Tax Payment System (EFTPS). You have to enroll in the EFTPS before you use it, so don’t delay until the day your quarterly estimated taxes are due. But after you’re all set up, you can use it like an automatic debit for tax payments and can even pay taxes over the phone.
What if I don’t pay quarterly estimated taxes?
Don’t fret if you’ve missed a quarterly estimated tax deadline. The penalty is only about three percent of the amount you owe until you catch up, as long as you pay up by April 15. That said, if you’re having a profitable year and suspect your end-of-year tax bill will be larger, it’s often worth it to make quarterly payments just to mitigate penalties and ensure you’re able to pay the whole chunk at once.
The IRS charges penalties and interest, so waiting three months could increase your tax bill. If you are really worried that you underpaid quarterly estimated taxes, use Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, to see if you owe a penalty for underpaying your estimated tax.
The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.