- If you own a business or opt for a low tax withholding rate on your paycheck, you may have to pay quarterly taxes to avoid an IRS penalty.
- The IRS allows you to pay your quarterly estimated taxes with an electronic funds transfer, debit card, or credit card online.
- As long as your bookkeeping and taxes are up to date, figuring out how much to pay can be very simple.
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Taxes are a fact of life for most Americans who earn more than $12,000 per year. But if you are self-employed, have a serious side hustle, or have a low withholding rate on your paychecks, you might need to pay your taxes four times per year instead of the once-annual filing most full-time employed people have to manage.
Filing your quarterly estimated taxes is a fairly simple and straightforward process. If you may owe $1,000 or more when you file, you’ll want to follow these steps to avoid penalties and make your quarterly filing as easy as possible.
How to pay quarterly taxes
1. Make sure your bookkeeping is up to date
The first step in paying your quarterly taxes is figuring out how much to pay. If you use a cloud accounting app like QuickBooks or Xero, it’s easy to generate a report that you can use to estimate what you owe. But to do that, you need your books to be up to date with the latest revenue and expense details.
It’s a best practice to update your accounting records at least once per month. This keeps you from getting behind and having a massive catch-up session the day before taxes are due.
Cloud-based platforms allow you to access your records on any device, offer better data security than desktop-based solutions, and allow you to sync your bank and payment accounts with your books for easy updates.
2. Generate a profit and loss statement
Once everything is updated and reconciled, you can generate an accurate and up-to-date profit and loss statement, also called a P&L or income statement. Again, look to your accounting app to crank out this report in just a few clicks. You’ll want to limit the dates to the quarter for which you are paying taxes.
The bottom line shows your profit, which is used to calculate how much you owe.
3. Estimate your tax liability
The potentially huge number of inputs used in your final tax return can take hours to put together using tax prep software depending on the complexity of your finances. Fortunately, the quarterly tax process is much simpler.
It’s better to estimate a little high than estimate low, as any excess taxes paid will come back in your refund. If you underpay, however, you may owe even more due to underpayment penalties.
Here are the 2019 tax brackets according to the IRS:
For tax year 2019, the top rate is 37% for individual single taxpayers with incomes greater than $510,300 ($612,350 for married couples filing jointly). The other rates are:
- 35% for incomes over $204,100 ($408,200 for married couples filing jointly)
- 32% for incomes over $160,725 ($321,450 for married couples filing jointly)
- 24% for incomes over $84,200 ($168,400 for married couples filing jointly)
- 22% for incomes over $39,475 ($78,950 for married couples filing jointly)
- 12% for incomes over $9,700 ($19,400 for married couples filing jointly)
- The lowest rate is 10% for incomes of single individuals with incomes of $9,700 or less ($19,400 for married couples filing jointly)
If you want to be conservative to avoid penalties and err on the side of a larger refund and keep the math simple, you can make your entire tax payment based on your top estimated tax bracket for the year. Multiply your quarterly revenue by four, look at the year-to-date trend, or compare to last year’s full-year results to get a reasonable proxy for your tax bracket.
Multiply your quarterly results by your tax bracket to get a number you may use for your payment.
4. Compare to last year’s taxes
If you use tax prep software or have an accountant do your taxes, your return from the prior year may come with estimated tax payment slips that tell you what you should pay. You may also make your tax payments based on last year’s results.
If you make less than $150,000 per year, you have to pay at least 90% of this year’s taxes or 100% of last year’s taxes over four quarterly payments to avoid a penalty. If your income was over the $150,000 mark, you have to pay 90% of this year’s taxes or 110% of last year’s to avoid the penalty.
5. Decide how you want to pay
Now you have a good estimate of what you’ll owe for the current year and can look at what you might owe at minimum based on last year. Do a quick comparison to make sure you are on track to be ahead of the 90% minimum for the current year or 100% (or 110%) of last year’s taxes.
Bank interest rates are low enough that I don’t worry about overpaying by a bit. I would rather end the year with a refund than find myself owing a ton of taxes come April.
6. Enter your payment
Now you know how much you’ll pay. It’s time to get to work entering that payment. The IRS gives you several options on how to pay. As long as they get their money, you are in good shape.
The system used to pay for free is called Direct Pay. You just need some basic information about yourself and info from your most recent return to complete the payment process.
Paying with a credit card incurs a fee. You generally should pay with Direct Pay over a debit card, but there are some situations where the fee is worthwhile on a credit card. If you are working on a big signup bonus on a new card, for example, you could pay your taxes with your card. It counts as a purchase toward the bonus.
However, unless you have some good rewards coming your way, the fee is higher than the rewards you’ll get back. Pay1040.com is currently the lowest-cost credit card processor to pay your taxes.
7. Save your payment receipt
Once you reach the last page of the payment process, make sure to print out the confirmation or take a screenshot for your records. You’ll need to know how much you paid each quarter to prepare your annual tax return.
Your confirmation also comes in handy should you ever have a disagreement about the payment with the IRS.
8. Check the IRS website to see your payment reflected
Did you know the IRS has a website where you can view information about prior year taxes, balances due, and payments on your account? Head over to the IRS website to view your tax account.
While this step is optional, it’s not a bad idea to log in the following day to make sure your payment is reflected properly.
9. Put next quarter’s due date on your calendar
Congrats, you’re all done! But before you put your quarterly estimated taxes completely behind you, take a moment to write down the next due date so you stay on track. As long as you meet the minimums and don’t miss the quarterly due dates, you should be all clear of penalties. And, if you do accidentally pay a little extra, you’ll always get it back when you file your tax return.