Explain it like I'm dim: how do I make a quarterly estimated payments?
July 24, 2022 10:52 PM Subscribe
I generally understand the concept of quarterly estimated payments for my non W-2 income but I've never quite figured out how to DO the thing.
So I have a private practice, and it makes some dollars. The first two quarters of this year it was negligible after expenses I can put on my Schedule C and I had little idea how much I'd be making so I figured well, I'll pay the penalty when I do my taxes.
My practice picked up somewhat and my impression is even if I didn't do Q1 and Q2 quarterly payments, I should go ahead and do Q3 six weeks from now. I'm just going to do about 40% of what's in my private practice account because apparently as a solo practitioner they just tax the hell out of you.*
But...I don't know how. I've gone to the IRS website. Either I was looking in the wrong places or it's not super evident. Walk me through this?
*and that's fine. I like roads and schools and stuff. Tax me.
So I have a private practice, and it makes some dollars. The first two quarters of this year it was negligible after expenses I can put on my Schedule C and I had little idea how much I'd be making so I figured well, I'll pay the penalty when I do my taxes.
My practice picked up somewhat and my impression is even if I didn't do Q1 and Q2 quarterly payments, I should go ahead and do Q3 six weeks from now. I'm just going to do about 40% of what's in my private practice account because apparently as a solo practitioner they just tax the hell out of you.*
But...I don't know how. I've gone to the IRS website. Either I was looking in the wrong places or it's not super evident. Walk me through this?
*and that's fine. I like roads and schools and stuff. Tax me.
Yes, actually do the ES worksheet instead of guessing. But you should pay electronically using an EFTPS account rather than mailing it in.
posted by michaelh at 11:23 PM on July 24, 2022 [2 favorites]
posted by michaelh at 11:23 PM on July 24, 2022 [2 favorites]
Ok, so I'm not a tax professional anything, but my understanding is if you have a regular W-2 job you can just increase your withholding on your W-4 with your employer to cover the extra income from your solo practice. This takes care of the need to pay quarterly taxes on your solo income as you're instead just paying biweekly or whatever from your main job income. Of course you have to work out/estimate how much more you need to have withheld which may fluctuate as your solo income goes up and down throughout the year, so might be best to just overshoot if you really want to avoid the risk of the (relatively small) underpayment penalty.
Since you're likely still a sole proprietor, my understanding is you can just use Direct Pay instead of EFTPS.
This gets me to some advice that doesn't directly answer your question, but might be helpful if you're thinking of growing your practice to a full-time situation in the near-to-intermediate future: Look into incorporating sooner rather than later if you're going to be making the bulk of your income from this. It seems like a lot of work (it's not that bad with the support of a CPA) and does have some initial extra expense (the CPA and maybe a lawyer/LegalZoom or whatever to draw up and submit basic incorporation paperwork) when you just want to jump in and focus on clients, but you save quite a bit more in taxes and the headache of having to do all the incorporating work later down the line when you really just want to focus on the clinical work. Anyway, it's something I wish I would have done from the start so thought I'd pass that experience on for what it's worth.
posted by flamk at 1:16 AM on July 25, 2022 [5 favorites]
Since you're likely still a sole proprietor, my understanding is you can just use Direct Pay instead of EFTPS.
This gets me to some advice that doesn't directly answer your question, but might be helpful if you're thinking of growing your practice to a full-time situation in the near-to-intermediate future: Look into incorporating sooner rather than later if you're going to be making the bulk of your income from this. It seems like a lot of work (it's not that bad with the support of a CPA) and does have some initial extra expense (the CPA and maybe a lawyer/LegalZoom or whatever to draw up and submit basic incorporation paperwork) when you just want to jump in and focus on clients, but you save quite a bit more in taxes and the headache of having to do all the incorporating work later down the line when you really just want to focus on the clinical work. Anyway, it's something I wish I would have done from the start so thought I'd pass that experience on for what it's worth.
posted by flamk at 1:16 AM on July 25, 2022 [5 favorites]
Best answer: Create an online account with IRS. Select "make a payment" and then there will be a drop down menu where you choose what type of payment (estimated taxes aka 1040-ES). As for how much to pay, that's where a CPA or an online tax calculator comes in, depending on how risk averse you are. Search for calculators specifically for self-employed people.
posted by never.was.and.never.will.be. at 5:20 AM on July 25, 2022 [1 favorite]
posted by never.was.and.never.will.be. at 5:20 AM on July 25, 2022 [1 favorite]
The ES worksheet helps you guess a little better, but of course it's still based on things you're guessing about the future. You don't have to get it perfect.
Having little patience for ... things, I've always just mailed a check with the payment voucher from the 1040-ES form. They receive it and deposit it really fast, even in the covid era when processing returns (and issuing refunds) was delayed by many months. Imagine that. But that doesn't even matter, because it's the postmark date that counts.
After the first year you do this, they'll mail you the form and pre-printed vouchers and even envelopes for subsequent years.
posted by fritley at 5:40 AM on July 25, 2022 [2 favorites]
Having little patience for ... things, I've always just mailed a check with the payment voucher from the 1040-ES form. They receive it and deposit it really fast, even in the covid era when processing returns (and issuing refunds) was delayed by many months. Imagine that. But that doesn't even matter, because it's the postmark date that counts.
After the first year you do this, they'll mail you the form and pre-printed vouchers and even envelopes for subsequent years.
posted by fritley at 5:40 AM on July 25, 2022 [2 favorites]
Do you have W-2 income? If so, the strategy suggested above does work. I have an LLC but I’m married and we file jointly. We take additional tax out of my spouse’s income and try to hit 0 at tax time. I put away around 30% of my LLC income “for a rainy day” or taxes. If we’ve done our figuring right, we owe very little and there’s no underpayment penalty.
posted by amanda at 6:50 AM on July 25, 2022
posted by amanda at 6:50 AM on July 25, 2022
Based on my knowledge as a freelancer who works as a sole proprietor - yes, the 1040-ES and the IRS Direct Pay that flamk linked should be what you need. There should also be a state equivalent you'll probably be able to pay online, in NY I know it's the form IT-2105. You'll get a transaction number you can keep for your records, and I believe you'll have to fill out the dates and amount of each payment for your taxes at the end of the year.
In my work it's extremely hard to predict what my overall income will be for the year let alone what proportion will be on 1099 vs W2, and the ES worksheet has been almost useless for me. I usually just pay about 30% of what I've made at the end of each quarter where I have 1099 income - often this means I only pay it for one or two quarters out of the year. Never had trouble with this method, I think the IRS mainly cares that you don't owe an excessive amount at the end of the year and not so much about how accurately it's broken up between the quarters.
posted by limnerent at 6:57 AM on July 25, 2022
In my work it's extremely hard to predict what my overall income will be for the year let alone what proportion will be on 1099 vs W2, and the ES worksheet has been almost useless for me. I usually just pay about 30% of what I've made at the end of each quarter where I have 1099 income - often this means I only pay it for one or two quarters out of the year. Never had trouble with this method, I think the IRS mainly cares that you don't owe an excessive amount at the end of the year and not so much about how accurately it's broken up between the quarters.
posted by limnerent at 6:57 AM on July 25, 2022
In my work it's extremely hard to predict what my overall income will be for the year let alone what proportion will be on 1099 vs W2, and the ES worksheet has been almost useless for me. I usually just pay about 30% of what I've made at the end of each quarter
Similar to above, my income is all 1099 and it’s still hard to predict what it will be each year. The IRS wants you to pay 25% of your yearly taxes each quarter but I really can’t do that. I often overpay a bit I the first 2 quarters because my 4th quarter is often way more of my income. I’ve gotten penalties from my state for under-paying a quarter even though I got a refund, ugh. I use an accountant but for me she generally says pay ~x% Fed and x% state. Don’t forget state estimated payments (if you live in a state with income tax). If you don’t use an accountant for your w2 taxes/life and your business is very small and you are trying to avoid the expense of an accountant you can start here. That said, your w2 status might mean there’s more creative ways to go about this but you’d have to talk to a professional. Generally, I’d plan to save 30% of all income for taxes just in case, which I think is a good start. Definitely set it up to pay online. I use EFTPS but it takes a while to get that account set up (they mail you a passcode). I think there’s newer/easier ways to pay online as well directly to the IRS.
posted by Bunglegirl at 7:34 AM on July 25, 2022
Similar to above, my income is all 1099 and it’s still hard to predict what it will be each year. The IRS wants you to pay 25% of your yearly taxes each quarter but I really can’t do that. I often overpay a bit I the first 2 quarters because my 4th quarter is often way more of my income. I’ve gotten penalties from my state for under-paying a quarter even though I got a refund, ugh. I use an accountant but for me she generally says pay ~x% Fed and x% state. Don’t forget state estimated payments (if you live in a state with income tax). If you don’t use an accountant for your w2 taxes/life and your business is very small and you are trying to avoid the expense of an accountant you can start here. That said, your w2 status might mean there’s more creative ways to go about this but you’d have to talk to a professional. Generally, I’d plan to save 30% of all income for taxes just in case, which I think is a good start. Definitely set it up to pay online. I use EFTPS but it takes a while to get that account set up (they mail you a passcode). I think there’s newer/easier ways to pay online as well directly to the IRS.
posted by Bunglegirl at 7:34 AM on July 25, 2022
Make sure you understand the payment dates -- they're quarterly, but not actually quarterly:
January 1 – March 31 are due April 15 (normal tax day but separate from your regular filing (i.e. you're filing your 2022 taxes but paying 2023 estimated taxes)
April 1 – May 31 are due June 15 (note: only two months later!)
June 1 – August 31 are due September 15 (three months later)
September 1 – December 31 January 15* of the following year. (4 months later)
So if you break up your estimated taxes for the year in four equal chunks, those April and June payments comes really close together.
I haven't been estimating taxes for very long (my wife is all 1099 income but I have a W2 job, and I have my employer take extra out to cover our 1099 income) -- but her income has gotten big enough that taking more out of my paychecks is impractical so we estimate. From what I can tell, the IRS loves getting money, and is happy if you aren't too short the next year when you file your taxes.
If you *do* get it wrong and it's more than you can afford right when you file, immediately set up a payment plan -- those, also, are very easy and the IRS doesn't really care because, again, you're sending them more money. They mostly get mad when you fail to contribute enough for the current year AND neglect to pay in future years. Payment plans do have fees so they're best to avoid (and hard to make payment plan payments and estimated taxes payments at the same time).
posted by AzraelBrown at 8:52 AM on July 25, 2022
January 1 – March 31 are due April 15 (normal tax day but separate from your regular filing (i.e. you're filing your 2022 taxes but paying 2023 estimated taxes)
April 1 – May 31 are due June 15 (note: only two months later!)
June 1 – August 31 are due September 15 (three months later)
September 1 – December 31 January 15* of the following year. (4 months later)
So if you break up your estimated taxes for the year in four equal chunks, those April and June payments comes really close together.
I haven't been estimating taxes for very long (my wife is all 1099 income but I have a W2 job, and I have my employer take extra out to cover our 1099 income) -- but her income has gotten big enough that taking more out of my paychecks is impractical so we estimate. From what I can tell, the IRS loves getting money, and is happy if you aren't too short the next year when you file your taxes.
If you *do* get it wrong and it's more than you can afford right when you file, immediately set up a payment plan -- those, also, are very easy and the IRS doesn't really care because, again, you're sending them more money. They mostly get mad when you fail to contribute enough for the current year AND neglect to pay in future years. Payment plans do have fees so they're best to avoid (and hard to make payment plan payments and estimated taxes payments at the same time).
posted by AzraelBrown at 8:52 AM on July 25, 2022
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posted by Blue Jello Elf at 11:15 PM on July 24, 2022 [4 favorites]