What is the Penalty For Not Making Quarterly Tax Payments?

If you’re a freelancer, gig worker or self-employed person, paying taxes doesn’t just happen once a year. Depending on the amount of money you make, you may qualify for paying estimated quarterly tax payments. These happen quarterly, or four times a year, meaning you’ll encounter the dreaded tax day more often.

But not everyone is aware that they’re expected to make these payments. With so many dates to keep track of, you might forget to make a payment by the deadline or even underestimate your payment.  

Rest assured, we’ll go over everything you need to know about estimated quarterly tax payments, including penalties and how to manage them if you happen to get one.

What is quarterly estimated tax?

This is a tax payment based on your reported income for a certain period of time. As a freelancer, gig worker or self-employed person, your taxes aren’t being withheld by an employer. So it’s now up to you to pay taxes on your income directly to the government in the form of estimated tax payments.  

Any income not eligible for withholding is eligible for estimated quarterly tax including capital gains and dividends, rental income or earned income.

Typically, Social Security and Medicare taxes are automatically taken out of your paycheck if you work a W-2 job. Since this isn’t the case for those who are self-employed, the IRS requires you to pay self-employment taxes. Self-employment taxes are 15.3%, 12.4% for Social Security and 2.9% for Medicare.    

So it’s a good idea to set aside a certain percentage of your monthly income for tax purposes.

So who pays quarterly estimated tax?

Self-employed individuals pay estimated taxes, but not every self-employed person qualifies. If you’re self-employed and expect to owe at least $1,000 in taxes, then you’ll qualify to make quarterly estimated tax payments.

Not sure if you qualify? You can use a quarterly tax calculator to help determine if you’re eligible.

Quarterly estimated tax deadlines

The quarterly tax payment dates are April 15, June 15, September 15 and January 15 of the following year, unless the deadline falls on a weekend or holiday. Since the deadlines happen four times a year, setting up payment reminders or marking the dates on a calendar may be helpful.

Calculating estimated quarterly tax payments

You’ll need to add up your total liability for the current tax year. This includes individual income tax, self-employment tax and any other taxes you might owe. Then divide that number by four.

Let’s break it down into simple terms.

1. Estimate taxable income for the tax year
2. Calculate income tax
3. Calculate self-employment tax
4. Add everything together and divide by four
   

With the help of a quarterly tax calculator, you’ll easily have your estimated tax payments sorted out.

Missing the deadline for quarterly estimated tax

The IRS may issue a penalty if you miss a quarterly tax payment deadline. The penalty is 0.5% of the amount unpaid for each month, or part of the month, that the tax isn't paid. The amount you owe and how long it takes to pay the penalty impacts your penalty amount. So it’s better to make the payment as soon as possible. You can use a tax penalty calculator to help figure out the amount for the penalty you owe.

Even if you can’t afford the payment, it’s best to pay some of the amount owed, since it will reduce the penalty amount.

Underpayment penalties

If you don’t pay enough estimated taxes, you might also be at risk for receiving a penalty by the IRS. It’s impossible to know the exact amount you’ll owe. But, the IRS offers a safe harbor method to help you calculate your payments.

You can avoid the underpayment penalty if you owe less than $1,000 after subtracting your withholding and credits. Also, if you paid 100% of your taxes from last year’s tax return or 90% of your withholding tax.

If you want to avoid these penalties, make sure you pay estimated quarterly taxes on time and avoid underpayment. Following these tips for estimated quarterly payments can help you avoid penalties and save your hard-earned money. It’s always best to seek advice from a tax expert, and the FlyFin CPA team can answer all of your quarterly tax payment questions.