Self-employed business owners have a lot of responsibilities. In addition to managing day-to-day operations, marketing, sales, and financial management of their companies, they must also stay on top of federal, state, and local tax reporting and payment obligations. One of the requirements that causes confusion among entrepreneurs is estimated tax payments.
Because the U.S. income tax system is a “pay-as-you-go” system, taxpayers are expected to remit taxes on their earnings throughout the year. Employers typically withhold and remit taxes to the IRS and state tax authorities, including the employee portion of Social Security and Medicare taxes. Self-employed entrepreneurs must make these payments directly.
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When are 2021 Q1 estimated taxes due for self-employed individuals?
Most small business owners need to make estimated payments that cover both income taxes and self-employment taxes. These estimated taxes are due quarterly, with each payment period having its own due date.
In general, you need to make estimated payments if your tax liability for the year is at least $1,000 after subtracting withholding and refundable credits, and if your withholding and refundable credits are less than the taxes you paid in the previous year or 90% of the taxes you owe for the current year.
For the first quarter, January 1 through March 31, the due date for most self-employed taxpayers is April 15 – the same as the year-end tax payment deadline for 2020. However, businesses with fiscal years that do not begin on January 1 are subject to special rules.
Please note that the IRS has extended the tax deadline for individual filers to May 17, 2021. However, this extension does not apply to estimated first quarter tax payments that are due on April 15. If you file your taxes quarterly, your Q1 deadline is still April 15.
How do I calculate my estimated quarterly taxes?
If you work with a tax accountant or use accounting software, you can determine your quarterly tax filing obligation based on your actual quarterly earnings. You can also calculate your estimated total taxable income, accounting for deductions and credits, and multiply your adjusted gross income (AGI) by the tax rate based on your income bracket.
If you earn more than $400 in income, you must also pay both the employer and employee share of Social Security and Medicare taxes. Take your estimated total income times 92.35% to get the amount of taxable income for self-employment taxes, and then multiply that result by 15.3%. IRS Form 1040-ES can help you calculate this amount.
Add your estimated income tax obligation and your estimated self-employment tax obligation together and divide by four (for four quarterly payments).
Will I need to pay taxes on a PPP loan that is forgiven?
Section 1102 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act created Paycheck Protection Program (PPP) loans for small businesses, designed to help them weather the unexpected financial challenges wrought by the pandemic. Employers who used the funds for allowable purposes under the law, including payroll costs, rent, interest on mortgage obligations, and covered utilities could apply for loan forgiveness.
The CARES Act allows loan amounts that are forgiven under the law to be excluded from gross income for tax purposes. In addition, business owners may also be eligible to deduct business expenses paid for with PPP loan proceeds.
How do I pay my quarterly taxes?
There are several ways you can make your federal quarterly estimated tax payments:
- The Electronic Federal Tax Payment System website
- IRS Direct Pay site (direct payment from your bank account)
- Pay by credit or debit card (subject to fees)
- Mail a check or money order
If your state imposes income taxes, you may also have to make quarterly estimated tax filings to your state tax authority.
What happens if I haven’t been paying my quarterly taxes?
In most cases, if you do not make estimated tax payments, but your withholding from other sources makes up at least 90% of your total tax obligation and the amount withheld is at least as much as you paid in federal taxes last year, you will not incur penalties or have to pay interest.
However, if you do not meet that criteria, the IRS could impose penalties and charge interest from the date your estimated taxes became overdue. The IRS calculates penalties separately for each required quarterly installment.
Stay On Top of Your Tax Obligations
Do you have questions about whether you are required to pay estimated taxes, or need some guidance related to your specific circumstances? Consult with a Rocket Lawyer On Call® attorney for fast and affordable advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.