No one enjoys the process of filing and paying taxes. If you’re self-employed, operate an LLC, or have a side hustle, you may carry the additional burden of paying estimated quarterly tax payments. The rules, regulations, and filing process can seem overwhelming, but with the right information and a good system in place, it doesn’t have to be stressful.
Not everyone who earns income outside of traditional employment is required to pay quarterly taxes, so it’s critical to learn whether you have to make these estimated payments and when the payments are due. Missing a deadline can result in an underpayment penalty.
Who Must Pay Quarterly Estimated Taxes?
According to the Internal Revenue Service (IRS), you are not required to pay estimated taxes if you earned income outside employment, and both situations listed below apply:
- If you expect to owe at least $1,000 in federal income tax when you file your annual tax return; and
- Withholdings and tax credits will cover more than 90% of their tax liability, or you had no tax liability for the prior year.
If both items above do not apply, and you earned money from a source other than your employer, then you may have to pay quarterly estimated taxes. This includes income from sources such as:
- Self-employment
- Freelance work
- Operating a partnership
- Operating a sole proprietorship
- S Corp Shareholders
- Gig workers who do not have an employer withhold taxes
- Interest
- Rental income
- W-2 workers whose tax liability is not fully covered by employer withholdings
- Corporations who expect to owe $500 or more when it’s time to file an annual tax return
If you are still unsure about whether you have to make quarterly estimated tax payments, use IRS Form 1040-ES to determine if you should pay quarterly taxes and determine the amount you should pay. If you need advice specific to your situation, please call (480) 776-6055 or use this form to request a consultation. We can help clarify your tax situation, offer tax-saving strategies, and help you avoid IRS collections and audits.
Why Do I Have to Pay Estimated Taxes?
According to the IRS, taxes are pay-as-you-go, not a large bill that comes due at the April 15th tax filing deadline. If you work for an employer, you pay as you go in the form of paycheck withholdings, and your employer assumes the responsibility for sending the payments to the IRS.
When you earn money outside of W-2 employment, you are responsible for the same pay-as-you-go tax liability. Failure to pay enough tax throughout the year can result in substantial underpayment penalties. In typical circumstances, you can avoid any penalties by paying your quarterly taxes on time and paying at least 90% of your tax liability throughout the year.
The rapid growth of technology, galvanized by the COVID-19 pandemic, promoted explosive growth in the so-called gig economy. People have found creative ways to earn income outside of the typical employee situation. As a result, more people than ever are required to pay quarterly estimated taxes.
When Are Quarterly Estimated Taxes Due?
Quarterly taxes, as implied by the name, are due once per quarter or four times per year. The IRS publishes an estimated tax schedule each year. Though the dates are usually the same, it is a good idea to check the yearly schedule, as holidays and other factors (such as a global health pandemic) can lead to changes. For 2023, the estimated tax schedule is listed below.
| Income Period | Tax Payment Due Date |
|---|---|
| January 1 – March 31, 2024 | April 15, 2024 |
| April 1 – May 31, 2024 | June 17, 2024 |
| June 1 – August 31, 2024 | September 16, 2024 |
| September 1 – December 31, 2024 | January 15, 2025 |
The Safe Harbor Rule
Underpayment penalties, plus interest, can result in a large tax bill. However, the IRS offers a safe harbor rule that states they will not charge you an underpayment penalty if:
- You pay at least 90% of the tax you owe for the current year, or 100% of the taxes owed for the previous year, or
- You owe less than $1,000 in taxes after subtracting withholdings and credits.
High-income earners have a slightly modified version of the rule. If the Adjusted Gross Income (AGI) of your previous year’s return was over $150,000 you must pay 90% of taxes for the current year or 110% of taxes in the prior year to avoid the underpayment penalty under the safe harbor rule.
Arizona State Taxes
Arizona has a state income tax, and quarterly estimated tax payments work much like they do on the federal level. To learn whether you need to pay state taxes quarterly and to calculate the amount you need to pay, use Form 140ES.
How Do I Pay Estimated Taxes?
Quarterly taxes are paid directly to the IRS. If your income remains relatively stable from one year to the next, you can calculate the amount you owe by dividing your previous year’s tax burden into four equal payments. If your income varies significantly from quarter to quarter, the IRS provides a Tax Withholding Estimator tool to help you find the amount you should pay.
Remember, err on the side of caution. If you overpay your taxes, you’ll receive that money back in the form of a tax return refund. However, if you underpay, you may face penalties and interest.
Visit the IRS payment page to learn about payment options such as IRS Direct Pay or the Electronic Federal Tax Payment System. You can also pay by check or money order. For Arizona state taxes, payments can be made using the Arizona Department of Revenue e-file services.
Need Help with Your Taxes?
Don’t let the burden of estimated quarterly taxes stop you from experiencing the liberation of self-employment or business ownership. It can seem daunting to no longer rely on an employer to handle your tax withholdings and payments. However, with a good system, an excellent tax strategy, and the help of an experienced Arizona tax attorney, you can minimize your tax burden and avoid any unpleasant surprises.
Whitney Sorrell assists business owners in preparing their company for growth by addressing all legal matters pertaining to business operations. Schedule a consultation today, and let us help you stay in control of your LLC.
