If you're self-employed and expect to owe at least $1,000 in federal income taxes this year, then you have to pay quarterly taxes. Unfortunately, if you forget to pay -- or worse, ignore them -- the IRS may hit you with severe penalties that can make your tax burden even heavier.
What happens if you don't pay quarterly taxes?
If you fail to pay your quarterlies, the IRS will charge you 0.5% of the unpaid taxes for each month you leave the tax unpaid. The tax would then cap out at a maximum of 25%, or roughly 50 months after the unpaid tax was due.
For example, let's say you owe $3,700 for the second quarter of 2023, but you don't pay the tax by the quarterly deadline of June 15. The IRS will expect you to pay 0.5% of $3,700, or $18, for every month you avoid the tax. That means, if you waited until January 2024, the IRS would charge you eight months worth of penalties, or $144.
What happens if you underpay?
If you don't pay enough taxes for a quarter, you may also have to pay a penalty.
Unlike the penalty for missing deadlines, the IRS doesn't have a flat fee for quarterly underpayments. Often, you won't know the penalty until after you file your annual tax return and the IRS can determine how much money you still owe.
That said, not everyone will be responsible for paying a penalty on underpayments. The IRS will forgive underpayments if you fall in two groups:
- You owe less than $1,000 after subtracting withholdings and credits. If the difference between what you've paid and what you owe is less than $1,000, the IRS won't hit you with a penalty.
- You pay at least 90% of your taxes for the current tax year, or you paid 100% of last year's taxes, whichever is smaller. I know that's confusing. But think about it this way: If you earned less last year -- but paid all of your taxes -- the IRS won't charge you a penalty for underpaying taxes this year. Conversely, if you earn less this year (but pay 90% of your taxes), you also won't pay the penalty.
And yes -- the IRS will penalize you for underpaying quarterly taxes even if you make up for it later. So if you paid $1,000 less for taxes in your first quarter, but paid $1,000 extra in the second, the IRS would still penalize you.
If you're unsure about the underpayment penalty, you can look at the IRS's Form 2210, which will give you more details.
When are quarterly taxes due?
For the 2023 tax season, the deadlines are the following:
- April 18
- June 15
- Sept. 15
- Jan. 16, 2024
If you're self-employed, it's important to keep track of these deadlines. With the exception of Tax Day, which is broadcasted widely, quarterly tax deadlines can fall between the cracks. To avoid paying penalties, you might want to set reminders the day before the quarterly deadlines. You can also set up regular quarterly payments on the IRS's website, which might be best if your income is the same every month.
