@floridaman41 congrats on becoming full time self employed!
The IRS uses a pay-as-you-go income tax system, meaning you must pay your taxes as you earn income. It enforces this by charging penalties for underpayment if you haven't paid enough income taxes through withholding or making quarterly estimated payments. It also charges penalties on late payments even if you end up getting a refund.
The IRS uses a couple of rules to determine if you need to make quarterly estimated tax payments:
- You expect to owe more than $1,000 after subtracting withholding and tax credits when filing your return, or
- You expect your withholding and tax credits to be less than:
- 90% of your estimated tax liability for the current tax year
- 100% of the previous year's tax liability, assuming it covers all 12 months of the calendar year
These are commonly referred to as safe harbor rules. The 100% requirement increases to 110% if your adjusted gross income exceeds $150,000 ($75,000, if you're married and file separately).
Here is a great resource that talks about this and gives more details on quarterly payments:
https://turbotax.intuit.com/tax-tips/self-employment-taxes/a-guide-to-paying-quarterly-taxes/L6p8C53...
Let us know if you have any other questions.
Lori EA
