How to Pay Taxes When You’re Self Employed2 min read • March 06, 2019
There are endless perks to being your own boss. Starting a business, choosing who to work with, and earning more are a few reasons to make the jump. But unfortunately, self-employment is a lot more than chasing your dreams. Paying taxes is one of the most stressful parts of the job. If the thought of tackling yours makes you uneasy, learning some of the basics may ease your concerns.
You need to pay quarterly taxes
It’s exciting to strike out on your own. And nothing beats the thrill of seeing income hit your business accounts. It may feel like a lot of money — until you learn about quarterly taxes.
Our tax system is pay-as-you-go. The IRS expects their share as you earn it. That’s why companies withhold taxes from their employees’ paychecks. When you are self-employed, they expect you to fork over taxes every quarter. There are no exceptions unless you expect to owe less than $1,000 for the year.
You may avoid last-minute scrambling by jotting down this year’s quarterly tax deadlines:
- April 15, 2019
- June 17, 2019
- September 16, 2019
- January 15, 2020
If you decide to mail payments, they must be postmarked by the due dates. You can skip the last one if you file your annual taxes before January 31, 2020, and include your fourth payment.
How to pay quarterly taxes
Now that you know the government expects these payments, let’s look at your options for getting them the cash. Because the IRS is so eager to get their money, they offer more than one way for you to do it. You can pay online, by phone, through a mobile device, by cash in-person, by check, or money order. You can learn more about each one — and their fees — through their website.
What happens if your don’t make your quarterly tax payments
We get it — quarterly taxes are a big hassle. While it may be tempting to blow them off, doing so may lead to costly penalties. The good news is, you won’t owe a penalty if your quarterly estimated payments are the smaller of:
- A minimum of 90 percent of your taxes for the year.
- Or 100 percent of last year’s taxes.
If you skip your estimated tax payments, the IRS will calculate a separate penalty for each one. First, they will figure out how many days each payment is late. Then they will calculate how much interest you owe for each payment. The failure-to-pay penalty is .5 percent of the tax you owe — up to 25 percent.
You shouldn’t make a habit of late quarterly estimated tax payments, but if it’s your first time, the IRS may cut you a break from their penalties. Unfortunately, you will still owe interest, though. Regardless of your quarterly tax payments situation, make every effort to file your annual taxes on time. The failure-to-file penalty is an even bigger fine.
Avoid quarterly tax mistakes by working with a professional
When you are kicking off a new business, it’s easy to cut corners to try and save money. But attempting to do-it-yourself with taxes may lead to mistakes, costing you both time and money to fix. By working with a professional, you are less likely to get hit with penalties, interest, or worse — a surprise tax bill in April.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.