How do I know if I have to make estimated quarterly tax payments?

July 23, 2022

This is a great question because everyone who's self-employed will have to make estimated tax payments at some point.

Why? Because when you work for yourself, there's no employer to withhold taxes from every paycheck.

The government doesn't want to wait a full year to get their tax money, so we have to pay it in quarterly. If employers didn't withhold any taxes from paychecks, regular employees would have to do the same thing.

But to answer the question, if you expect to owe more than $1,000 in taxes, you need to submit estimated quarterly payments to the IRS.

This introduces another question - how do you know how much you'll owe?

My best advice is that you should be working with a tax professional (CPA or EA) to help with tax filing and they'll help with the calculations, but you can also use a calculator like this one - Estimated Tax Calculator.

Here's an example with $45,000 of income:

Another example - if you made (or expect to make) $10,000 in your first year out on your own, you could expect to owe a little less than $1,000 after the 50% self-employment tax adjustment and Earned Income Tax Credit.

Most likely, you wouldn't owe any income tax (because the standard deduction is more than the total income). Then, because the tax bill would be less than $1,000 total, you shouldn't have to make the quarterly payments. However, because every situation is different and there could be other things playing into your total tax bill, it's important to do your own calculations.

If you have business expenses that qualify as deductions, you can also use them to lower your taxable income, which would lower your tax bill.

Also read: How do tax write-offs actually work?

If you've been freelancing for a year or two, you can use your prior year tax bill as a starting point because according to the IRS, "you are required to pay 100 percent of the total of your prior year’s taxes, or 90 percent of your estimated current year’s taxes - whichever is less".

Also read: IRS' Guide to Estimated Taxes

Payments can be submitted via phone, mail, or the easiest option - online.

They need to be made quarterly by the due dates below and failure to do so could result in an underpayment or late payment penalty from the IRS.

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