Self-employed and new to quarterly tax

[Alli_H]

I've been a freelancer for a few years now, but only this year I got a fine for not paying quarterly taxes when I did my tax return in April. I didn't realize I needed to pay quarterly taxes. Are quarterly taxes an estimate of your income for the whole year, or just based on what you've made in that quarter? I'm not sure how this works...

[dsoile]

Hello Alli_H

Im sorry about the fine that you received for quarterly estimated tax payments. 

How quarterly estimated tax payments work is that these are tax payments that you make quarterly to the IRS based off your projected income for the current tax year you are making those quarterly estimated payments for.

The fines and penalties for underpayment of estimated tax are usually because of the following: 1) did not pay enough estimated tax on your income or 2) you paid the estimated tax after the due date for a particular quarter.

So lets say, for the 2023 tax year, your taxable income was X, and after factoring in any estimated tax payments made during 2023 and/or credits, you ended up owing federal taxes in the amount of Y. For the 2024 tax year, you will have 4 vouchers, each of which will be for a specific quarter during the year at a disclosed amount of A for each voucher (these vouchers will be generated for you, and the amounts on these vouchers are based off your 2023 tax liability). These amount on each voucher are estimates of what you have to pay each quarter to avoid underpayment penalty for the current tax year. 

[Alli_H]

Thanks for the reply!

So if this is based on an estimate of what my 2024 taxes will be, how do I know I'm paying enough in quarterly taxes? Since I freelance, there's no way of knowing if I'll make more or less year by year. It just fluctuates. So what if my estimated income ends up being lower than the income I end up earning? How do I avoid underpayment fees for that? And for the opposite, if I overpay, I will get a refund on that, correct? 

[VolvoGirl]

Yes after paying estimated payments you either end up with more tax due or a refund on your tax return.  You have to make your own good estimate of your income.

You must make quarterly estimated tax payments for the current tax year if both of the following apply:
- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits.

- 2. You expect your withholding and credits to be less than the smaller of:
90% of the tax to be shown on your current year’s tax return, or
100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)

For the Penalty....., most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. 

[Alli_H]

Ok, thanks! It just seems like it would be more precise and effective to just pay tax on what you've earned for that quarter rather than a whole estimate of the year. That way you're almost guaranteed to pay taxes in the correct amount, right? I just don't understand why it's set up to do an estimate of the whole year, but I guess that's just the way it goes.