Maybe this is the year you finally fulfilled that dream of launching a small business and becoming your own boss. Or maybe that side hustle you’ve been running for years really started to take off in the past few months.
Either way, it’s really exciting to see your small business or side hustle reach another level of success. Way to go! But that success comes with a price . . . and part of that price is having to deal with estimated taxes.
Here’s everything you need to know about estimated taxes and how you can make sure you’re on the IRS’s good side as you level up your side business!
What Is an Estimated Tax Payment?
Estimated tax payments are made to the IRS four times a year to pay for income taxes and self-employment taxes owed by freelancers, independent contractors and small-business owners.
Got small business tax questions? RamseyTrusted tax pros are an extension of your business.
Why is this even a thing? The U.S. is a pay-as-you-go tax system, which means the IRS wants everyone to pay their taxes throughout the year, not just in one lump sum. While most salaried employees simply have their taxes withheld from their paychecks by their employer, folks with income from their own small business or side hustle don’t have that luxury.
Instead, the IRS requires some folks with self-employment income to pay these estimated taxes every quarter.
Who Pays Estimated Taxes?
Anyone who expects to owe at least $1,000 in taxes from their self-employed income throughout the year is required by the IRS to make estimated tax payments. So if you’re in business for yourself and business is booming, then you should be prepared to cut Uncle Sam a check every few months.
Here’s a pro tip: Open up a separate savings account earmarked just for taxes and make a habit of saving 25–30% of all your self-employment income in that account. That should be more than enough to help you cover your tax bill!
Who Doesn't Pay Estimated Taxes?
Salaried employees who have their taxes withheld from their paycheck can breathe easy—they don’t have to worry about estimated taxes at all. And if you expect to owe less than $1,000 in self-employment income this year, you can also skip those quarterly payments and just pay your taxes on that income when you file your annual tax return.
What if you are a salaried employee and you have a successful side hustle that would put you above that $1,000? You could avoid the hassle of paying estimated taxes by asking your employer to increase your tax withholding to cover the taxes you owe from your side hustle.
To avoid getting fined by the IRS, you’ll want to talk to your tax advisor first to make sure you’re withholding the right amount.
How to Calculate Estimated Tax
Figuring out how much you owe in estimated taxes isn’t as difficult as you might think! Here’s a step-by-step process to help you figure out how much you’ll need to pay in estimated taxes.
Step 1: Estimate your taxable income this year.
Not sure where to start? This can be a ballpark figure based on what you made last year or what you’re projecting to make this year. It doesn’t have to be an exact number—just something to help you get started.
Let’s say you’re filing single and have a small business you expect will bring in $40,000. After deducting business expenses, you estimate your taxable income will be about $30,000.
Step 2: Calculate how much you’ll owe in taxes.
There are two taxes we need to math out in order to figure out your estimated taxes, so grab a calculator, a pence and a few sheets of paper, and strap in.
The self-employment tax is a little trickier—stick with us here. Generally, the self-employment tax is 15.3% of most of your net income from self-employment. Wait . . . most? Yes. That’s because half of that tax (7.65%) is deducted from your net income first.
So here’s how you’d figure out your self-employment tax in two easy steps:
STEP 1: Multiply your net self-employment income by 92.35%.
$30,000 x 92.35% = $27,705
STEP 2: Multiply that number by the self-employment tax rate.
$27,705 x 15.3% = $4,239
So that means you’ll owe another $4,239 for the year in self-employment taxes.3
Now all you have to do is add your income tax and self-employment tax together, and you’ll get to your estimated taxes for the year. In this case, your total estimated tax bill for the year is $6,079.
Income Tax: $1,840 + Self-Employment Tax: $4,239 = Estimated Annual Taxes: $6,079
Step 3: Divide your annual estimated taxes into quarterly payments.
Now that you know you owe more than $1,000 in taxes from your self-employment income, all you have to do is divide that total amount you owe for the year into four estimated payments you’ll pay to the IRS every quarter. In this case, that’ll be around $1,500.
Remember, the taxes above are just an estimate. If you see your income is going to be higher or lower than you thought it would be, adjust your estimated tax payments to match.
Also, you still need to file an annual tax return by Tax Day to show what you actually made during the year. This is also when you can lower your tax bill by claiming credits and deductions you qualify for.
When Are Estimated Taxes Due?
It’s time to grab a pen and circle these important deadlines on your calendar (or set a reminder on your phone) so you don’t forget to pay on time!
In most years, the estimated tax deadlines are April 15, June 15, September 15 and January 15 (unless those days fall on a weekend or holiday).4 Here are the estimated tax deadlines for 2022:
When You Get Paid
Tax Due Date
Jan. 1–March 31
April 18, 2022
April 1–May 31
June 15, 2022
June 1–Aug. 31
Sept. 15, 2022
Sept. 1–Dec. 31
Jan. 17, 2023
Penalty for Underpayment of Estimated Taxes
If you don’t pay enough to cover what you owe in estimated taxes every quarter, brace yourself . . . because you’re about to get hit with penalties courtesy of the IRS.5
How much, exactly? Well, there’s no specific dollar amount or percentage you can use to figure out what you owe. Instead, the IRS will calculate your penalty based on the following factors:
- The total underpayment amount
- The period when the estimated taxes were due
- The interest rate for underpayments (which the IRS updates every quarter)6
And if you’re late on a tax payment, the late payment penalty is generally 0.5% of how much you owed after the due date—and that goes on every month the tax remains unpaid, up to 25%.7
Listen, the last thing you want is to have the IRS hounding you about underpaid or late taxes, so do everything you can to make sure you pay that balance off in full as soon as you can. If you need help, work with your tax advisor to figure out how much you owe and how you can get current.
How to Pay Estimated Taxes
When you’re ready to pay Uncle Sam, you can pay your estimated taxes in several ways:
- Pay online. Go to the IRS payment page and set up online payments for your taxes using a bank account or a debit card.8
- Pay by phone. Enroll for free in the Electronic Federal Tax Payment System (EFTPS) and use their voice response system to pay your taxes over the phone.9
- Pay by app. You can pay your taxes through the IRS2Go app right on your phone or tablet.10 Thanks, technology!
- Pay by cash or check. You can also find your local IRS office and pay in person or mail them a check or money order.11
Work With a Tax Pro
Whether you’ve been running your small business for several years or you’re just trying to get your side hustle off the ground, taxes can get really complicated really fast—especially once you have to start paying estimated taxes.
That’s why you need a trustworthy tax advisor in your corner—someone who can help you year-round with any tax questions or situations that might pop up.
You can find a RamseyTrusted tax pro through our Endorsed Local Providers (ELP) program. They’ll help take the stress out of taxes so that you can focus on what you do best.