Quarterly tax payments are a fact of life for the self-employed. Here are our best tips to budget and save for these necessary payments.
Self-employment comes with a lot of perks. There’s the flexibility of making your own schedule, the freedom of being your own boss, and the fun of building something from the ground up. Whatever your reason for being self-employed, it’s an amazing adventure.
However, there are also some surprises, and one of these is the much-maligned quarterly tax payment. If you’re one of the nearly 10 million self-employed people in the US, quarterly taxes are a fact of life. However, if you’re new to self-employment, you might not be familiar with them. In this article, we’ll run through everything you need to know so you can get started on the right foot.
What are quarterly taxes?
Quarterly taxes, or estimated taxes, are essentially income tax payments for self-employed individuals. When you’re employed by a company or someone else who gives you a paycheck, they will generally withhold income taxes from your earnings and pay them to the IRS each time. Then, when you file your taxes each year, you basically check the math and tell the IRS whether you overpaid or underpaid (and either get a refund or owe additional money).
When you’re self-employed, you’re responsible for making these payments throughout the year yourself. You can make as many payments as you like, but since self-employed income isn’t always on a straightforward schedule, the IRS has set a quarterly schedule for these payments. You can pay more often if you like, but if you don’t make at least these quarterly payments, you’ll be subject to penalties.
They’re called estimated payments because it’s hard to pinpoint exactly how much you’ll owe in income taxes once you add up all your income and deduct everything for the year. You may underpay and owe the IRS more money, but it’s also possible that you overpay and get a refund—yes, you can get a tax refund even when you’re self-employed (provided you make your quarterly tax payments!).
2023 quarterly tax deadlines
The deadlines for these taxes are roughly the same every year, although the exact dates may change depending on holidays or weekends. For 2023, the tax deadlines are as follows:
April 18, 2023
June 15, 2023
September 15, 2023
January 16, 2024
Don’t miss that the last payment is actually in 2024! You make your final quarterly tax payment for the 2023 tax year in January 2024.
Three reasons to budget for quarterly taxes
Budgeting and paying your quarterly taxes is essential for a few reasons:
Break your taxes into manageable chunks: If you don’t pay them, you’ll need to pay the total amount when tax time rolls around each year. It can be difficult for many small businesses to come up with the cash to pay these large lump sums—in the worst cases, this leads to people simply not paying their taxes at all, which comes with consequences.
Avoid late-payment penalties: You’ll be penalized if you don’t meet the quarterly estimated payment deadlines. This amounts to 0.5% of the amount unpaid for each month that the tax isn’t paid—up to six percent if you don’t pay any for the entire year. This penalty is assessed when you file your annual income tax return.
Relieve some stress: Tax time is stressful enough already, particularly for small business owners and self-employed individuals. Having it already accounted for in your budget—and already paid into the IRS—can make a difference in your mental well-being.
How to save for quarterly taxes
Now that we know why you should budget and save for quarterly taxes, let’s dive into exactly how to do it:
Set aside a percentage of your income
The most straightforward way to save for your quarterly taxes is to save a portion of your income specifically for this purpose each time you get paid. How much should you save for quarterly taxes? The most commonly recommended amount is about 25%. That sounds like a lot but remember: when you’re self-employed, you’re paying an additional amount your employer would ordinarily be responsible for. It’s also not just income tax but FICA tax (Social Security and Medicare) that you’re paying.
This can be a major adjustment if you're used to living off your income and winging it at tax time. That's why having a budget is important—you can clearly see where you're spending your money. The right accounting software can help simplify the saving process by automatically pulling out money from each deposit and setting it aside.
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Found’s auto-save feature sets aside money for taxes every time you get paid. With every new income or expense, Found updates your tax estimate in real time. That way, you’ll know what to expect when your quarterly estimated payments are due.
It's a good idea to put aside the money for quarterly taxes in a separate account so that it doesn't accidentally get spent. Consider opening a savings account in addition to your business bank account.
Overestimate your expenses
To ensure you always have a buffer, overestimate your expenses slightly when budgeting. This way, you reduce the risk of running short and keep a cushion in your bank account. After all, it's always better to have more money than scramble when unexpected expenses—tax payments or something else—come up.
Review suppliers and vendors for better deals
Consider shopping around for better prices with suppliers. This doesn’t just have to include materials or physical items, either—you can also shop around for services like internet, cloud storage, or project management. There are tons of options for these types of key infrastructure pieces. The same goes for any contractors you hire.
Cut off unnecessary services
It's a good practice to periodically review the software and services you spend money on to see if they're still necessary. You may have subscribed to a design suite for an advertising campaign but forgot to unsubscribe. Alternatively, you can get by with a cheaper plan that has fewer features.
Make tax time a breeze
Tax season is intimidating for many self-employed people, but it doesn’t have to be. Making quarterly tax payments can help ensure that the fuss at filing time is minimal. It’s also a lot less stressful to pay in smaller chunks.
If you need help handling your tax situation, try Found. Our powerful accounting tools can automate savings for taxes, freeing you up to worry about more impactful things. Try Found for free today!
The information on this website is not intended to provide, and should not be relied on, for tax advice.
