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With inflation still high and a possible recession on the horizon, Americans are turning to side hustles to make ends meet. In some cases, they take that second (or third) job as an employee. In others, as with rideshare drivers, tutors, Airbnb hosts, eBay resellers and freelancers of all stripes, the hustle constitutes self employment. If that describes you, there are some tax considerations you need to know about.
The IRS requires you to pay federal income tax as it accrues, not as a lump sum at the end of the year. If you’re an employee, your employer meets the requirement for you by withholding income tax on your check. But as a self-employed individual, you’re required to make estimated tax payments on your own to avoid interest and penalties.
Below are the tax filing deadlines for tax year 2023. The deadlines begin with the fourth quarter of 2020 because the due date to make that estimated payment just passed on Jan. 15. Likewise, the deadline for your fourth-quarter 2021 estimated payment is Jan. 17, 2022 — Jan. 15, 2022 falls on a Saturday, so the payment is due on the next business day.
Quarterly Tax Deadlines
According to the IRS, you can pay all of your estimated tax by April 18, or you can pay it in four equal amounts by these dates:
- First quarter of 2023 April 18, 2023
- Second quarter of 2023: June 15, 2023
- Third quarter of 2023: September 15, 2023
- Fourth quarter of 2023 January 16, 2024
Read on to find out more about how to pay your estimated taxes and minimize your tax debt at the end of the year.
What Are Estimated Tax Payments and Who Pays Estimated Taxes?
The IRS requires that you pay taxes on income as you earn it. If you’re an employee, that’s easy — your employer withholds federal income tax and Social Security and Medicare taxes from your paycheck. But you don’t have a way to withhold taxes from income you earn through self employment, so you estimate what you owe once per quarter and pay that amount to the IRS.
Generally, you must make estimated tax payments if you expect to owe more than $1,000 when you file your income tax return and you are self-employed, an independent contractor or you receive dividend income, work as a freelancer or even have gambling winnings. However, you are exempt from paying estimated taxes if you meet the following three conditions:
- You did not have any tax liability for the previous year
- For the entire year, you were a U.S. citizen or resident
- Your prior tax year covered a 12-month period
How Can You Calculate Estimated Quarterly Taxes?
You might be wondering, “How much tax will I pay?” There are two methods to calculate estimated taxes:
1. Safe Harbor
If you expect to owe estimated taxes, the easiest way to calculate the amount is to rely on the safe harbor. Under the safe harbor, you won’t face any interest or penalties if your equal, quarterly tax payments — plus any other withholding — constitute at least 90% of the tax you owe for 2023 or 100% of the amount of your taxes for tax year 2022.
You might need to pay more if your prior-year adjusted gross annual income was higher than $75,000 ($150,000 for married couples filing a joint return). In this case, your estimated tax payments must be at least 110% percent of the tax from your prior year’s return.
Make Your Money Work For You
For example, if your AGI from the previous year is $100,000, you’re a single filer and you owed $16,000 in taxes last year, you must pay at least $4,400 each quarter to avoid interest and penalties under the safe harbor method of calculating estimated taxes. If you earned $75,000 or less and owed $16,000 last year, you must pay at least $4,000 each quarter.
2. 90% of Taxes Due
The other option is to make sure your estimated tax payments equal 90% of your taxes due. You can calculate this number with your estimate of how much you’ll earn for the year plus how many deductions you’ll qualify for — including itemized deductions — and tax credits you can take. Use Form 1040-ES as a tax estimator to assist with your calculations.
Working as a freelancer can be unpredictable, so it can be hard to know exactly how much you’ll earn. You can do your best with estimates, but if your estimate for how much you’ll owe is too low, you could find yourself on the hook for interest and penalties for underpaying your estimated taxes. For these reasons, it’s safer to use the safe harbor method, especially if you expect to earn more this year than you did last year.
How Does Withholding Affect Estimated Quarterly Tax Payments?
If you have a job that withholds money from your paychecks for taxes, that money counts toward the amount you have to pay in estimated taxes. For example, if for each quarter you need to pay $4,000 but your employer withholds only $2,500, you will need to pay $1,500 in estimated taxes each quarter.
Make Your Money Work For You
You can ask your employer to withhold an additional amount on top of your normal withholding so you don’t have to make estimated tax payments on your self-employment income. You can update your Form W-4 to change your withholding with your employer at any time. It’s important to rethink your withholding when you have any major life event, such as getting married or having a child.
How Do You Make Make Estimated Quarterly Tax Payments?
You can make estimated tax payments quarterly throughout the year by mail, by phone or electronically.
These are your options for electronic payments:
- Mobile device: Download the IRS2Go app to pay by direct payment from your checking or savings account or via a debit or credit card.
- Electronic fund withdrawal: E-filers can use this payment method when filing a return using software or through a professional tax preparer or the IRS.
Mailing in your payments means you have to submit estimated tax payment vouchers, which can be found on Form 1040-ES, to identify your payments. You should also make your check payable to “United States Treasury.” Where you must mail your vouchers and checks depends on where you live — check Form 1040-ES to find the mailing address you should use.
Once you’ve calculated the amount you owe, pay your estimated taxes by the due date for each quarterly payment. The deadline is pushed to the next business day if it falls on a weekend or holiday. However, you don’t have to make the fourth-quarter payment by that date if you file your tax return early.
Make Your Money Work For You
How Should You Report Payments on Your Income Taxes?
If you’ve made estimated tax payments throughout the year, you must report them on your regular income tax return to get credit. You report them on line 26 of Form 1040 or 1040-SR when you file a tax return. If you overpaid in 2022, you’ll receive an income tax refund in 2023 unless you apply the overpayment to next year’s taxes.
What Are the Penalties for Underpayment of Estimated Taxes?
If you underpay your taxes, you could owe interest and penalties. If you think you owe a penalty, check Form 2210 to determine whether the IRS will figure it for you.
You might qualify for an exception if you missed a payment, however. The IRS says the penalty for underpayment might be waived if it was caused by a disaster or other extreme circ*mstance, or if you retired — and you were at least 62 — or became disabled, and you had reasonable cause for the underpayment.
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Daria Uhlig and Gabrielle Olya contributed to the reporting for this article.
