According to the U.S. taxation system, you need to pay the tax when you earn an income. Most of the taxpayers in the country do not need to be concerned about the taxpaying as their manager keeps money from their checks to settle their taxes. If you are not tied up with any organization and work independently, you also need to pay your taxes independently. Taxes are paid four times around the whole year, and these taxes are known as estimated Quarterly Taxes. The sum of the quarterly tax payments should match the tax accountability for the year.
What are Estimated Quarterly Taxes?
In case you are a freelancer, small business owner, or an independent contractor, you need to pay and manage your taxes on your own. One of the most significant fundamental components of assessing your dues is to be organized. The Internal Revenue Services (IRS) introduced a quarterly tax payments system for the income that is not subject to automatic withholding, such as earned income through means of self-employment, dividend income, rental income, interest income, and capital gains. The taxpayers also record yearly tax returns to record their total dues. While filing the annual tax at the end of the taxpaying year, taxpayers pay the due amount or request reimbursement for an overpayment. The quarterly tax is divided into four segments, and you pay them four times a year rather than paying the entire amount altogether at the end of the year.
These quarterly taxes are utilized to pay for the following:
- Federal Income tax
- State income tax
- Self-employment taxes
- Social security
Being self-employed, if you owe more than $1000 in taxes when you file your annual tax return, you have to pay quarterly taxes. The equivalent is the situation with corporations that expect to pay around $500 to the government.
Tax deductions for Freelancers
Most freelancers are unaware of the tax deductions policy, and they overpay on their taxes. They are always worried about their quarterlies as they do not calculate the deductions while filing their expenses in the tax returns.
There are several expenses that are included in the list of tax deductions, which every self-employed should know.
- Home office deductions
Work from home is the new-age workspace. Many people are working from home, and especially after the pandemic, many permanently shifted their offices to home. While you work from home, you can benefit from the home office deduction on taxes. This deduction implies on expenses related to a home office like electricity, water, rent, mortgage, furniture, and other utilities. These deductions are very crucial while calculating your estimated taxes.
- Internet and Telephone deductions
While you work from home or purchase a property to run your business, the fundamental necessity is the internet in today’s time. Setting up internet costs much high, and you are eligible to claim an internet tax deduction for the same purpose.
Similarly, suppose there is a need to set up a separate telephone service line to conduct your business. In that case, you can utilize that expense to deduct from your taxes under telephone tax deduction.
- Office Supplies deductions
All the accessories, equipment, instruments, or supplies required to run your business efficiently are considered under expenses applicable to tax deductions.
Stationery products, for example, pens, paper, printer ink, and so on, and furniture for offices are also counted in office supplies deductions and can be written off from your tax returns.
- Education Expenses deductions
Education costs are also deductible. However, only education related to your business or profession is eligible for deductions. You must prove that the education you are claiming for a tax write-off is a program to enhance your professional skills or a course to renew your license for your trade, or a compulsory certification.
- Health Insurance Premium Deduction
Being a freelancer, you can claim deductions on your health insurance amount as well.
How to calculate your estimated quarterly tax payment?
Knowing how much to pay to the government in the form of tax is important. You need to calculate your estimated quarterly taxes if your income is not subject to withholding. You will need to require little knowledge of financial predictions and terms as well. Here’s a brief on how you can calculate your quarterly tax:
Step 1: First, calculate your average monthly income and then multiply it by 12. This amount will give you an estimated income for the year.
Step 2: Once you have determined your annual income, it’s time to compute your quarterly tax payments. Begin with your total income. To sort out your final gross income, apply for any tax allowances (counting the self-employment deductions – business and personal deductions).
Step 3: IRS provides Tax Rate Schedules to settle your tax expense. Then calculate the final gross income by the current tax rate to determine the income tax to be paid.
Step 4: Now calculate the total self-employment taxes regarding Social Security and Medicare utilizing your total estimated income.
Step 5: Now sum up both the approximated income and self-employment taxes to get the total estimated tax for the year.
Step 6: Divide the total estimated tax into four parts to segregate it into quarterly taxes, and you are ready with your share of the amount from your income to pay to the concerned government bodies.
Use this widget to calculate quarterly tax:
As the name ‘Estimated Quarterly Tax’ suggests, these amounts are just estimates. You need to be very cautious while paying your taxes. If you pay less than what you owe on your quarterly tax payments throughout the year, you could be charged with a monetary penalty for underpayment. Also, late payments are subjected to a late charge fee.
Fortunately, there are a couple of tools that can assist you with estimating your quarterly charges and paying them on time. Flyfin’s Quarterly Tax Calculator helps you automatically find every deduction with the help of A.I. based system in just five minutes. The process is simple, you need to answer a few queries related to your business and expenses, and A.I. will accurately calculate your quarterly tax payments. Furthermore, you get a free service of consulting a CPA to help you prepare your quarterly taxes.