Get In There With Your Quarterlies
Tax Day.
That dreaded deadline that strikes fear into the hearts of individuals and businesses across the country. That looming financial spector, hovering over the first days of spring much like a dementor hovers over the Quidditch Pitch (you’re Harry Potter in this scenario btw). The prophesied day of nationwide malcontent that drains not only our collective bank accounts but our will to live.
But, it only happens once a year, right?
… right?!
Welp. There’s no easy way to say this, but if you’re a specific type of person doing a specific type of work? You might be writing a check to Uncle Sam at least 4 other times throughout the calendar year.
But fear not, intrepid entrepreneurs. Your quarterly estimated taxes don’t have to be the end of the world. Your quarterlies, in fact, can become a recurring and beneficial part of your schedule to chip away at your tax burden and create financial stability for you, your team and your business.
Quarterlies: an Interview
Y/N: What the hell are quarterly estimated taxes?
TFCFO: Quarterly estimated taxes are, essentially, taxes that you pay once-a-quarter. Well, not exactly (but more on that below). The basic idea is that instead of trying to fulfill an enormous tax obligation to the government once a year, you fulfill said obligation in four payments throughout the calendar year in smaller installments. This obligation isn’t based off of the hypothetical amount of money that you’ll be making this upcoming year, however. The IRS wants data, dammit! Therefore, your upcoming tax obligation will be based on how much you owed in taxes for last year.
Y/N: So, you pay them once a quarter… that’s every 3 months, right?
TFCFO: So, no. That’s the awkward part. You pay your quarterly estimated taxes in April, June, September, and January of the following year so quarterly estimated tax payments do not coincide with regular calendar quarters. The option exists to pay your “quarterlies” more than once a quarter (even once a month if you are so inclined), but the quarterly system remains the standard, and is how they’ll be recorded on your tax returns.
Y/N: Do we all have to pay them?
TFCFO: No, no, no! If that were the case, you’d know what they are and wouldn’t be reading this dope blog for the tea, honey. Quarterly estimated taxes are designed for those who are self-employed. This can include contractors, freelancers, investors, landlords and small business owners. Anyone with an estimated federal tax payment of over $1,000 falls under this category - or, in other words, anyone making over approximately $5,000 in self-employed profit during that calendar year.
So, not everyone has to pay their quarterlies but, like… a lot of people do.
Y/N: What if I work a normal person job on top of my self-employed income? Do I have to pay quarterlies for all of my income?
TFCFO: No, nada, nein. Your quarterly estimated tax burden only applies to the income that you make as a contractor, freelancer or small business owner. Whatever income you earn at your “normal person job” applies only to that Ever Dreaded April Date Of Which We Do Not Speak. Totally separate tax requirements, your majesties.
Y/N: What happens if I don’t pay my quarterlies when I should?
TFCFO: Well, ask yourself this: what happens when you fail to pay your yearly taxes on time? You get penalized. The penalties for quarterly estimated taxes are pretty minimal, all things considered, but it’s the interest that may end up catching up to you and your business in the long run.
These penalties also apply to:
insufficient funds
if you make your estimated payment late
if you’re due a refund
if you underpay on your quarterlies
In this way, you have to understand that just because you're paying quarterly estimated taxes does not mean that you won't still owe taxes at the end of the year. All it means is you're avoiding any underpayment penalties from the IRS because you weren't paying your taxes in installments throughout the year. That's all it avoids. And that’s why it’s definitely worth looking into finding an accountant, bookkeeper or tax preparer that can help you get a real-time snapshot into what you’ll owe quarterly, rather than playing the guessing game.
Y.N: What happens if I underestimate my quarterly installments?”
TFCFO: That’s a penalty, Your Majesties. Which is why performing the right calculation is so important (see below for that mathematical magic).
Y/N: And what happens if I overestimate my quarterly installments?
TFCFO: The IRS keeps it forever.
… lol, no, that’s super illegal. You’ll get the option of a refund, which is always delightful. Or, you can allow that extra money to roll over into your next quarterly payment, thus lowering that month’s burden!
How to Pay Your Quarterlies
1. Figure Out How Much You Owe
So, exactly how much are you going to owe the government every quarter(ish)? After all, as we just learned, you can still get penalized if you end up underestimating and underpaying your quarterlies. Luckily for you, we have a nifty and accurate Quarterly Estimated Tax calculator included in our “Quarterly Estimated Taxes Made Simple” course that does all of the hard work for you!
But if you’re the old school type that likes to do the numbers on you own, there are some tried and true “safe harbor” methods that the IRS recommends, including:
The 90% Method: estimate what you’ll owe in taxes this year, multiply it by 90% and divide it into four equal payments.
The 100% Method: use last year’s tax obligations and divide that into four equal payments. If your AGI (adjusted gross income) exceeds $150,000, however, you’re gonna wanna bump that percentage up to 110%.
The Annualized Method: If you’re making the majority of your income during only one quarter of the calendar year, you can annualise your income and deductions, and turn into those four equal payments. This method, however, requires some extra forms to submit with your tax return.
2. Plan It Out
If you’re as big of a fan of the Anti-Budget as we are, this part is going to be familiar. Depending on your upcoming quarterly tax burden, combined with your anticipated annual income, you can plan out and automate your quarterly estimated tax payments to work in harmony with your income flow, your goals, your investments and any other financial obligations. Like we mentioned above, this could even involve paying off your yearly tax burden in more frequent installments.
This part of the “Get In There With Your Quarterlies” journey isn’t as cut-and-dry as other steps, simply because it varies based on the needs, burdens and requirements of your individual financial situation. But, more on that later.
3. Pay Them Quarterlies
This is pretty straightforward. The IRS makes it very easy for you to fulfill your quarterly tax obligations by providing an online portal where you can pay this bill online, in minutes. You won’t be paying these taxes with your EIN (Employer Identification Number) because - as we briefly touched upon in “Laying Foundations - the Business Entity Rundown” - if you’re self-employed you’re most likely a pass-through entity. You’ll be using your SSN (Social Security Number) or ITIN (Individual Taxpayer Identification Number) for this transaction.
*Note - do not pay your taxes through the EFTPS (Electronic Federal Tax Payment System), as this will apply your taxes to your business, and not to you. Trust us, it’s a whole thing.
There’s a small catch - some states actually charge a fee for paying your quarterlies with your credit card. Absurd, we know, but an unfortunate reality. Look into your state of residence, see what the fees are (if any), and decide for yourself if it's something you can live with. If not, an old-fashioned check can get the job done just fine. We love VistaPrint for their cheap, easy and super adorable checks!
Here’s the Thing
Quarterlies are a system designed by the government, not ordinary, average, everyday Americans. With this system the IRS is able to obtain your taxes throughout the year in a more timely and efficient manner, the bonus being that you’re not stressing over that big ol’ April bill. But more than that, the quarterlies system - and the entire U.S. tax system, for that matter - were designed in the 1950s.
Some progress aside, these systems haven’t changed much in the 70+ years since.
In the 1950s, most working Americans worked a salary job. The tax burden that they anticipated for the upcoming calendar year probably wouldn’t be that different from prior years. Therefore, this system of taxation doesn’t at all take into consideration the fluctuations in income that naturally arise for most small business owners and freelancers out there (a demographic of the U.S. workforce that continues to grow in size). Quarterlies can, yes, relieve the burden of an enormous April tax bill, but they can also become an enormous source of frustration and angst for those who simply cannot keep up with IRS estimates and calculations.
So, what the hell is a finance baddie to do?
Our Recommendations
We like to think we’re good at what we do here at The Freelance CFO, and part of what we offer to our clients is one-on-one financial education that compassionately relates to you and your business’s specific situation and needs. Rarely does one business or individual require the exact same advice and expertise as another and that’s no different with your quarterly estimated taxes.
Some of our clients overpay, and they do so on purpose. They’d rather pay their quarterlies - and then some - in order to avoid penalties and interest, and to get a guaranteed refund back. That’s absolutely fine. Some of our other clients live in the ballpark of “Know what I owe, but keep the money close.” Business has become an interesting - and often volatile - place since the pandemic began, with no signs of settling down any time soon. Having those earmarked funds on hand offers these business baddies a sense of security that otherwise can be hard to find in these times of roaring inflation and economic uncertainty. That is also absolutely fine.
Some of our clients will even do a bit of both! They chip away at their tax burden incrementally, while also continuing to incur those pesky penalties. But, they’re still paying off their tax obligations throughout the year, and have enough money set aside for themselves in case another COVID-19 comes rolling around (wedonotclaimthisenergy). This. Is. Absolutely. Fine.
No matter what, whether it comes to your personal finances or the finances of your business, you have to do what is best for you. These decisions aren’t meant to be made lightly, and they do not have to be decisions you have to make on your own. When in doubt or disarray, always reach out to a trusted tax expert (like us. teehee).
So. When those unavoidable and dreaded tax deadlines loom near, and the wickedness of the IRS’s antiquated financial policies send you spiraling into a fit of despair and loneliness… find a Remus Lupin to your Harry Potter. Get your wand (or calculator) out, and learn the skills you need in order to survive, with the right teacher guiding you through the miseries of your past tax experiences towards a future of contentment, empowerment and intentionality.
And as for finding the right Defense Against the Dark Arts teacher to guide you? Well. That would be a burden we’d be more than happy to bear.
“Expecto Patronum, b*tch.”
Sales Plug - “Quarterly Estimated Taxes Made Simple” course
Disclaimer: The information provided in this blog is for educational purposes only and does not constitute financial or tax advice. Reach out to The Freelance CFO team with any questions regarding specific financial concerns, or seek the services of a fiduciary.
