If you’re self-employed, estimated taxes are a part of your business life. This means you may need to send quarterly estimated taxes four times a year (in April, June, September, and January) since the United States works off the principle of “pay as you go”, and self-employed don’t have taxes taken out of every paycheck. Employees have their taxes withheld by their employer, so they never have to think about it, but if you’re self-employed you have to pay taxes yourself.
If you’ve never understood how quarterly estimated tax payments work, how quarterly estimated tax penalties are calculated or determined, or how to best meet these obligations, here are some tips for you to help avoid estimated tax penalties.
Avoiding Underpayment Penalties
There are ways to avoid a penalty even if you underpay your obligation. The government knows you can’t predict the future with absolute certainty, especially when you’re self-employed, so they give you some leeway.
Generally, if you owe less than $1,000, you do not have to pay quarterly estimated tax payments and will not see an estimated tax penalty. If you pay at least 90% of your tax obligation or 100% of the tax owed in the prior year (whichever is smaller), then you will not be penalized. If you are a high-income taxpayer, with an AGI over $150,000, then the 100% is increased to 110%.
Finally, if none of those are true, you can request a waiver of the penalty under two conditions:
- You failed to make a required payment because of a “casualty event, disaster, or other unusual circumstance and it would be inequitable to impose the penalty”, or
- “You retired (after reaching age 62) or became disabled during the tax year or in the preceding tax year for which you should have made estimated payments, and the underpayment was due to reasonable cause and not willful neglect.”
You may also be able to avoid estimated tax penalties if you can use the annualized installment method at tax-time to reflect your fluctuating income and avoid estimated tax penalties. If you’re like most self-employed business owners, you may see slow months and then big boosts in others. However, if you do not receive income evenly throughout the year, your required estimated tax payment for one or more periods may be less than the amount figured using the regular installment method.
The annualized method determines your estimated tax liability as your income accumulates throughout the year instead of dividing your entire year’s estimated tax liability by four as if your income was earned evenly. So, if your income is concentrated, for example, in the fourth quarter of the year you may be able to annualize your income. TurboTax Self-Employed guides you through the annualized installment method at tax-time.
How to Make the Correct Estimated Payments
If your business is growing, the simplest way is to take your tax obligation from last year and make four equal payments that total slightly more than that amount. If you are a high-income taxpayer, make that four equal payments that total slightly more than 110%.
Otherwise, keep track of your income and expenses so that you can calculate actual taxes due each quarter. QuickBooks Self-Employed can easily calculate your quarterly estimated taxes since you can track your business income, expenses, and tax-deductible mileage year round.
If you underpay your estimated taxes but escape penalty, you can still pay the difference in April when you file your tax return.
Don’t worry about knowing these tax laws. TurboTax will ask you simple questions about you and your business and give you the tax deductions and credits you’re eligible for based on your answers. And if you still have questions you can connect live via one-way video to our expansive network of tax experts who are CPAs and Enrolled Agents with TurboTax Live to get your tax questions answered and have your tax return reviewed to help you file.