This weekend, more than a few self-employed people, small business owners, freelancers and independent contractors will be scrambling to pull together the documents and information they need to meet the IRS deadline that’s coming up next week.
Yes, there’s a tax deadline for quarterly taxes due to most states and the IRS on September 15. Do you owe the IRS a quarterly tax payment on September 15? (Since September 15 falls on a Sunday this year, taxpayers have until midnight, on Monday September 16 to make payment this year.)
If you are an independent contractor or profitable small business, you are probably facing an IRS deadline for a quarterly estimated tax payment, and you could be facing a tax deadline for your state as well.
Even if you aren’t profitable, you may still be facing a tax deadline next week, with an IRS deadline to file quarterly reports showing that you are not profitable.
Do I Have to Pay Quarterly Taxes?
You will have to make estimated tax payments to the IRS if you are:
- A freelancer, independent contractor, or self-employed individual who expects to owe $1,000 or more when you file your annual return.
- A corporation that expects to owe $500 or more.
Four times a year (quarterly), you are required to pay the IRS enough of your revenues to cover your income tax and your self-employment tax (Social Security and Medicare) obligations.
The rules for estimated tax payments for sales taxes, business and franchise taxes (note that you don’t have to own a franchised business in order to owe a state franchise tax – it’s what some states call the business tax charged to all businesses), and local and state income taxes in your home state may be different.
So check your state’s laws – or talk with an experienced tax accountant who understands the rules for small business – in order to avoid problems.
There is a penalty for underpaying the estimated tax. But the IRS has a safe harbor rule: if you pay at least as much as your previous year’s liability or pay within 90 percent of your actual tax liability, there is no penalty for underpayment.
How to Calculate Estimated Tax Payments
The IRS website has an Estimated Tax Guide that provides an overview for small business owners and freelancers or independent contractors. While it is helpful, it’s important to remember that it’s general information that may or may not apply directly to your business.
Each business situation is different – especially if you are a new entrepreneur with a start-up business, or a newly self-employed individual – so spending some time with a tax advisor can be a big help in understanding the best way to calculate what you owe.
There are three calculation methods that you might be able to use:
- If you are a freelancer or self-employed individual, use Form 1040-ES – the same form used to pay estimated taxes. It includes a worksheet that helps you calculate your quarterly estimated tax payment. If you are a corporation (LLC, S or C Corp, and certain types of farms and associations), use Form 1120-W to calculate estimated taxes. This method calculates your total projected tax liability for the year, and divides it into four payments.
- If you have been in business for more than a year, you can refer to the federal tax return from last year to calculate your current year estimated taxes. In the calculations be sure to include all the income and deductions you expect to take, and refer to the total tax you paid so that your estimated tax payments 100-110% of the amount you paid last year.
- If you are a seasonal business, or a freelancer or independent contractor facing fluctuating or cyclical income, you might prefer to calculate your estimated taxes on a quarterly basis. This requires that you calculate your taxes based on real income, deductions and expenses – not projections – and can be more time consuming than the other methods. But it can also allow you to make smaller payments in some quarters when cash flow is lower.
For more details on who is required to pay quarterly taxes and meet the September 15 tax deadline, download a free copy of the 1-800Accountant white paper, What Small Businesses and Independent Contractors Must Do About Taxes AFTER April 15. It’s available on the Resources page of the 1-800Accountant website, and includes plain-English explanations of the rules and deadlines for small business owners, freelancers, and independent contractors.