Quarterly Taxes: Deadlines Keep Coming for the Self-Employed

If you own your own business, you typically don’t have taxes withheld from every paycheck, so Uncle Sam wants you to pay estimated taxes in four installments. Normally, these payments are due on April 15, June 15, and September 15 of the current year, and January 15 of the following year. But this tax season, the federal tax filing deadline has been delayed to July 15 because of the COVID-19 health crisis. This means you have extra time to file 2019 tax returns and make payments without interest or penalties. Your first-quarter estimated tax payment is also due on July 15 (instead of April 15), but your second installment is still due on June 15, barring a postponement.

Underpayment Penalties

Making accurate quarterly tax payments on schedule can help you avoid penalties and keep you from falling behind with the IRS.

Sole proprietors, S corporation shareholders, and other self-employed individuals who expect to owe $1,000 or more in federal taxes must make estimated tax payments or face interest penalties for underpayment. Penalties begin accruing as soon as you miss one quarterly payment, and the IRS charges interest daily until you catch up. The annual rate, currently about 5%, is subject to change each quarter.

If your adjusted gross income (AGI) is $150,000 or less, your quarterly tax payments (and any withholding) must add up to at least 90% of this year’s taxes or 100% of last year’s taxes to avoid a penalty (110% if your income is above $150,000).

7.1 million self-employed taxpayers had underpayment penalties in 2012. 10.1 million had them in 2018.

Calculating Payments

The simplest way to estimate quarterly taxes is to divide last year’s tax liability into four equal payments. This may work out fine if your income is usually steady. If your income fluctuates or tends to be higher at the end of the year, you may want to use the “annualized installment method” instead. This way, estimated payments correspond to your normal cash flow, and you won’t face big installments on earlier due dates before you can pay them. But annualizing is also more complicated. You will have to track your income and expenses carefully and base your estimated payments on this year’s numbers.

If you are employed but receive income from sources other than wages (such as a side business, a spouse’s business, or investments), you could still be subject to estimated taxes if you owe $1,000 or more in taxes after salary withholding. In some situations, interest charges could be reduced or eliminated by increasing withholding (for you or your spouse) enough to offset the estimated taxes. In fact, the IRS has a new Tax Withholding Estimator (irs.gov/individuals/tax-withholding-estimator) that allows single or married employees who also have self-employment income to more accurately estimate their total tax liability and correct their withholding.

Calculators

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