The US tax system is a "pay as you go" system. That literally suggests that every time you receive some income you should pay some taxes. You might also read into that statement that when you finally get around to actually preparing your income tax return the taxes you calculate on that income tax return should be darn close to what you've paid during the year. Neither of these two statements is exactly correct.
First, just to make sure we're communicating properly, you don't really "file" anything quarterly. That is, you don't send in some sort of mini-income tax return with income and expenses, you don't have to "prove" anything to the IRS. You just have to send in a check with a Form 1040ES which is nothing more or less than a payment voucher.
Most people "pay as they go" by having taxes withheld from their wages, pensions, etc. But people who have significant income that's not subject to withholding have to pay "estimated taxes" and these payments are due more or less quarterly in April, June, September and January of the following year. Too, it's perfectly OK to owe the IRS a ton of money when you finally file your income tax return, you just don't want to be "underpaid". That's a piece of income-tax jargon with a legal meaning and, if you are "underpaid", you can incur some penalties.
Most taxpayers will avoid being underpaid if they:
1)owe less than $1,000 in tax after subtracting their taxes WITHHELD and available tax credits,
OR
2)if they paid at least the lesser of
a)90% of the tax for the current year, or
b)100% of the tax shown on the return for the prior year. (If last year's return shows AGI over $150K (for married filing jointly) then change that "100%" figure to "110%.)
Since you are now self-employed, and assuming that your new small business ends up making money for the year, your 2017 "tax for the current year" will be a combination of regular income tax plus a Self Employment tax on the business income at roughly a 15% rate. If it happens that your business has not made significant income in its first quarter or only a small amount you might even elect to not worry about the 3rd quarter estimated tax payment due 9/15.
Broadly speaking, the process of trying to determine the amount of estimated taxes you should be paying amounts to trying to estimate, as best you can, what your 2017 income tax return will look like and what the taxes on that income tax return will amount to. If you figure that the taxes due after subtracting taxes WITHHELD and available tax credits will be less that $1,000, you don't make estimated tax payments. If you figure that your taxes due will exceed that $1,000 then you shoot to make payments - withholding plus estimated taxes - that will get you into one of those two "safe harbors" mentioned above. Clearly the easiest of these two safe harbors to determine is the second one: your taxes from the prior year's income tax return. (That's line 63 for most people.) But if you think your actual 2017 income taxes might end up being significantly lower that the taxes shown on the 2016 income tax return, and you don't want to make an interest-free loan to the government, then you might shoot for that 1st safe harbor of 90% of the 2017 income tax amount.
TurboTax can help you with this "estimating" process. You should be able to use the "Form W-4 and estimated taxes" interview under the "Other Tax Situations" tab. That's where you'll enter your best guesses about 2017 activity, and TurboTax, if it decides you do need to make estimated tax payments, will give you various options and will produce the Form(s) 1040ES.
One other thing: the underpayment penalty is calculated on a quarter by quarter basis, and the assumption is that all income came in evenly throughout the year. So don't be surprised if TurboTax calculates an underpayment penalty initially since it will attribute some of your business income to the 1st and 2nd quarters, even if you weren't in operation at that time. There's a process called "annualization" where you go into the quarterly detail and take that income out of the first two quarters and put it into the 3rd and 4th quarter where it belongs. TurboTax has an interview for that, too, in that same "Form W-4 and estimated taxes" interview.
Tom Young
