How to pay estimated taxes as a sole proprietor

Being a solopreneur has many benefits: You can set your own hours, define your business priorities, and say goodbye to performance reviews. But a one-time tax season? This is not one of them.

In many cases, independent workers must pay the tax they owe not in one lump sum on April 15, but in four installments throughout the year. These payments represent the dreaded quarterly or estimated taxes.

Quarterly taxes can be confusing, but they don’t have to be scary. Once you know the basics and debunk a few pesky myths, you’ll be in good shape.

What are quarterly taxes?

The IRS requires independent workers, including freelancers, contractors and sole proprietors, to pay taxes on their income throughout the year rather than all at once. This is because without employer participation, this income is not automatically taxed when received, and the IRS wants to receive it in cash.
There are four quarterly tax payment deadlines throughout the year. They are:

• January 15

• April 15

• June 15

• September 15

If the deadline falls on a weekend or holiday, it is postponed to the next business day.

Who must pay quarterly taxes?

Let’s say you must make quarterly payments if you expect to owe $1,000 or more in taxes on your non-W-2 income during the year. (If you’re unsure, there are many tax assessors who can give you insight, including tax calculator from Mashable’s #1 Tax Software for freelance registrarsH&R block.)

Non-W-2 income includes self-employment income, which is the type of income you earn as a sole proprietor. Take this from the tax service: “If you run your own business, you generally need to make estimated tax payments.”

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How to calculate and pay quarterly taxes

So, you have to pay quarterly taxes. How do you know how much to pay each quarter? This issue may especially worry individual entrepreneurs with seasonally unstable income. For example, if you earn twice as much in the summer as you do in the winter, how will you know how much you will have to pay?

According to Logan Alleck, CPA and owner of a tax relief company. Choice of tax incentivesThere are several ways to evaluate your payments. The first is to simply save a percentage of what you earn each quarter and pay that amount. (This percentage may be yours effective tax rate from the previous year; otherwise, about 30% is a solid rule of thumb.) If you end up overpaying, you’ll eventually get that overpayment back in the form of a tax refund from the IRS.

The second method takes advantage of the so-called prior year safe harbor rule. Under this rule, the IRS will not charge you any underpayment penalties if you pay the same amount in taxes as the previous year. So, if you divide your previous year’s tax liability by four and pay that amount each quarter, you’ll be on good terms with the IRS, no matter what.

However, if your business has grown significantly since last year, use this method with caution: “You may end up owing more than you expected when you actually file your taxes for this year if you earned much more this year than ( you did) last year,” Allec says.

Finally, you can make an estimate using a little math. Every quarter, add up your actual income, multiply it by four (this will “roll over” it for the entire year), and then calculate your hypothetical annual tax liability based on that amount. Divide that number by four and you’ll get your estimated quarterly payout.

Once you determine the amount, you can make the actual payment via IRS Direct Payment Portal — or, if you’re really old-school, you can send a check.

Quarterly Tax Tips

Tax Tip #1: Don’t Forget About State Taxes

Alleck notes that in states that impose a state income tax, you may also have to make estimated quarterly payments to the state. “In addition to simply ignoring (or being completely unaware of) the requirement for quarterly state tax payments,” he says, “some taxpayers assume that federal payments work the same as state payments.” Make sure you know your state’s rules to avoid a surprise bill.

Tax Tip #2: Reduce Your Tax Bills with Deductions

If you’re self-employed and self-employed, you can deduct qualifying business expenses—such as home office expenses, postage and delivery costs, and business-related car expenses—to reduce your tax bill. A CPA can help you figure out what deductions you can claim. Tax filing platforms like TurboTax can also help you with business deductions, often for an additional fee or higher price. There are even apps like Guardian And Flyfin which you can use to track your business expenses throughout the year.

Tax Tip #3: Don’t Be Afraid to Hire a Professional

If you’re overwhelmed with taxes, have bookkeeping problems, or just don’t want to deal with it, don’t be afraid to work with a CPA, Alleck says. It’s an investment, but for many solopreneurs it’s worth it—plus, an accountant can help you minimize your after-tax bills.

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