In this blogpost, I discuss quarterly estimated tax payments, specifically who needs to pay them, when to pay them, how much to pay, how to make the payment and what happens if you fail to pay or underpay.
If you have not read my previous post which discusses what taxes you have to pay as an independent contractor (i.e. real estate agent, insurance agent, etc.), I highly recommend reading it before continuing reading this article – in that post I discuss the tax difference between an employee and an independent contractor. (Reminder: you are required to pay self-employment taxes (FICA – Medicare & Social Security), federal income tax and state income taxes as an independent contractor.)
Okay, so now that you understand you may be required to make quarterly estimated tax payments. Let’s dive into the details. Please note that if you live in a state or are earning income in a state that has state income tax, you’ll also need to make payments to that state. The contents of this article covers federal tax payments.
Who is required to pay estimated taxes?
Whether you are operating as a sole-proprietor, Limited Liability Company (LLC), Professional Limited Liability Company (PLLC), Partnership or S-Corporation, you need to make estimated tax payments if you expect to owe taxes of $1,000 or more when you file your tax return. Most independent contractors are Sole-Proprietors, Single-Member (P)LLCs or S-Corporations.
If for some reason you are an independent contractor and you formed a Corporation or Professional Association (PA) and the Corporation or PA has not elected to be taxed as an S-Corporation then, in general, you must make estimated tax payments if you expect to owe $500 or more when you file your tax return.
Who is not required to pay estimated taxes?
I cannot think of many independent contractors who meet the requirements below, but you are not required to pay estimated taxes for the current year if you meet all three of the following criteria:
- You had no tax liability in the prior year (don’t get confused by this – it doesn’t mean you didn’t pay anything when you filed your return because you withheld enough throughout the year as an employee or paid enough estimated tax throughout the year as a business owner, it means you had zero tax liability in the prior year.)
- You were a U.S. Citizen or resident for the entire calendar year
- Your prior year tax return covered a 12-month period.
When to start making estimated tax payments?
If you are a new business owner or independent contractor, you do not have to make estimated tax payments until you actually generate enough profit to owe income taxes of $1,000 or $500 as discussed above. Quite honestly, I could write about this in a very technical way and explain every single scenario but that would likely just confuse you (and besides, the IRS has already done so which is why you’re reading this instead of the IRS guidance). The goal here is to give you a basic understanding and provide some clarity.
Let me explain by way of an example. If you receive a $5,000 commission check and you incurred $1,000 in expenses (e.g. mileage reimbursement, marketing, MLS fees, desk fees, photography fees, etc.), your profit on the sale equates to $4,000. From this profit, you will be required to pay 15.3% in self-employment tax and, more than likely, another 10% in federal income tax. Therefore, you will already owe more than $1,000 in taxes for the year. ($4,000 in profit x 25.3% in combined self-employment and federal income tax = $1,012).
When are estimated taxes due?
You may have heard the phrase pay-as-you-go. As it relates
to self-employment and federal income taxes, you must pay as you earn/receive
the income throughout the year. You may have also heard that you must make
“quarterly” estimated tax payments, but “quarterly” as defined by the IRS is
different than you may think. Below are the periods and due dates for each “quarter”
as defined by the IRS:
| Period: | Due Date: |
| January 1st – March 31st | April 15th |
| April 1st – May 31st | June 17th |
| June 1st – August 31st | September 16th |
| September 1st – December 31st | January 15th, the following tax year |
Note that although these are the due dates, you can always make the estimated payments weekly, monthly, the day you receive your commission check etc. as opposed to waiting until the actual due date.
Okay, hopefully by now you understand that you are required to pay estimated taxes if your tax obligation is $1,000 or more, approximately when you may cross the $1,000 threshold of making estimated tax payments, and when the estimated tax payments are due. Now, let’s discuss how to make the estimated tax payments.
How to make estimated tax payments?
You can make your estimated tax payments using the Electronic Federal Tax Payment System (EFTPS). This is the fastest and “easiest” way (per the IRS) to pay your self-employment and federal income taxes. Keep in mind that new enrollments into the EFTPS can take up to five business days to process. To enroll you can click here. If you are an individual (you have not created an LLC or Corporation) you’ll need your social security number, name, phone number and some other pieces of information to enroll. If you are a business, you’ll need your employer identification number (EIN), business name and a few other miscellaneous items. Once you complete the enrollment, just follow the instructions for making the payments. You can make the payment with your checking account for free or use a debit or credit card for a fee.
What happens if you don’t make or fail to send enough money for your estimated tax payments?
Don’t panic. Yes, you may owe a penalty, as well as interest, however there are a few ways you can avoid this. The ways you can avoid the penalty are:
- You end up owing less than $1,000 in self-employment and federal income tax after subtracting withholding, factoring in deductions and refundable credits or
- Throughout the year, you paid withholding and estimated taxes of at least 90% of your current year tax obligation or you paid 100% of the tax show on your tax return for the prior year, whichever is smaller.
If you don’t quality for avoiding the penalty via one of the ways noted above, then as soon as you realize you didn’t make enough estimated tax payments throughout the year, contact the IRS. I know that may sound strange, but if you contact the IRS, they may be able to help you calculate exactly how much you have underpaid and help to get you current. There is a possibility you may even be granted a waiver given the reason you did not make the payment timely. If you fail to make any payments or didn’t send enough money to cover your tax obligations you will be charged a penalty as well as an interest charge so contact the IRS and do not prolong the issue. Even if you do not have enough money to pay the estimated taxes, contact the IRS and try to work something out. You may be surprised at the outcome.
I hope that you found this information helpful. Please feel free to comment or reach out to me directly should you have any questions or feedback. For more information related to who must pay estimated tax, how to calculate estimated taxes, when to pay estimated taxes and the penalties associated with the underpayment of taxes you can visit the IRS site by clicking here.
About the author: Navi Maraj is a Certified Public Accountant in the State of Florida and is the President of FileYourBusiness.com, Inc. and the owner of Navi Maraj CPA, PLLC. FileYourBusiness.com is a website dedicated to educating entrepreneurs about legal entity types and their respective tax treatment. Additionally, Florida entrepreneurs can utilize FileYourBusiness.com to form their business. Navi Maraj CPA, PLLC is an accounting and tax firm specializing in independent contractors and small businesses.
Disclaimer: The content of this article is not to be considered legal or tax advice and is provided for informational purposes only.