Self-employment quarterly payments?

[slyeddie]

Do you have to make estimated self-employment taxes quarterly (assuming approximately $6,000/yr in self-employment income)? If so, how do you figure out how much to pay? TurboTax helps you make estimated payments for federal and state taxes, but what about estimated self-employment taxes?

Thanks!

[HelenC12]

Whether you need to pay estimated taxes depends on your situation. There are so many variables. Is the $6,000 income before business expenses or after business expenses? Do you currently get a large refund that may cover the increase in self-employment (SE) tax and income tax?

• The rule is that you must pay your taxes as you go throughout the year through withholding or making estimated tax payments. 
• Your estimated taxes are due each quarter if you have a gain or profit (income less expenses) from your business. If you have a loss one quarter, you don't have to pay estimated tax. 

For self-employment income taxes, you need to factor in the fact that you pay self-employment (SE) taxes in addition to federal income taxes and state income taxes (if applicable). The SE tax rate is 15.3% with 12.4%for Social Security and 2.9%for Medicare.

• Please see the TurboTax Article Estimated Taxes: How to Determine What to Pay and When.

Scroll down to Do I need to pay estimated taxes? to determine whether you need to make quarterly estimates.

If you do need to make estimated tax payments, scroll down to How should I figure what I owe?

One way to estimate what you need to pay is to create another Online account in TurboTax and enter all your 2022 income, deductions plus your estimated self-employment income. It's free as long as you don't print it.

• You'll be able to get a good estimate of what your tax will be for the year and whether you'll need to make estimated payments or not. 

[slyeddie]

I will have $6,0000 of income from self-employment next year (from a side-gig). I guess what I'm really asking is does TurboTax include the "extra" stuff like FICA and Medicare (self-employment tax) in the federal estimated taxes for next year?

Thanks!

[DavidD66]

At the end of your state return, TurboTax will ask if you want to make estimated tax payments.  If you indicate yes, the program will help you calculate the amount. We'll even generate the payment vouchers for you to print along with your return.  

TurboTax calcuates estimated tax payments for 2023 based on your 2022 tax info, we'll use the lower of the following IRS-approved methods to calculate your estimated tax payments.

1. 90% of your estimated 2023 taxes.
2. 100% of your actual 2022 taxes (110% if your adjusted gross income was higher than $150,000, or $75,000 if Married Filing Separately)

[slyeddie]

Thank you. That is helpful. Just to be clear, are FICA and Medicare included in those estimated payments?

[DaveF1006]

No. Estimated tax payments are strictly federal income tax payments.  Does not include FICA and Medicare. 

@slyeddie 

[slyeddie]

Okay, thanks. I think I should have made my original question more clear. So, TurboTax does not assist in any way for making estimated self-employment (meaning FICA & Medicare) payments?

[AliciaP1 · Accepted solution]

No, but it doesn't need to.  The IRS assigns the amount of FICA (which is Social Security tax and Medicare tax combined) based on what is calculated on your tax return.  There is not a separate process for paying FICA taxes unless you pay payroll and issue W-2s.  

Self-employment taxes are only determined once you have the full year of activities reported.  That amount is added into your Total Tax on your annual individual tax return.  You now just have "Tax" to pay.  Your withholdings (if you have any) and the estimated payments you may have made are applied to the Tax amount and you are left with either an amount due or if you're lucky, a refund.

@slyeddie

[Superfly]

Alicia, and everyone else, I appreciate the responses I have been reading regarding estimating quarterly payments.

I will need to pay quarterly taxes in 2023 for the first time. I don't think I'll make as much as I did in 2022, but I was thinking I would target 100% of 2022's taxes just incase things pick up later in the year. To that end, can I just take one of the following values from my 2022 1040 form to use as my estimate?

Line 24 ("This is your total tax") and divide by 4?

Line 37 ("This is the amount you owe") and divide by 4?

I would prefer to go with line 37 as it is about 1/4 the amount of line 24, but am uncertain what penalties look like if I am too low.

On a side note, I don't understand why the IRS doesn't have us submit our quarterly taxes based on actual income instead of an estimate. It seems ridiculous to be penalized for an estimate that comes in low. My Magic 8 Ball hasn't been very reliable over the years so I'm left to my own devices.

[Vanessa A]

You will need to target line 24.  Your total tax and divide that by 4.  Line 37 is line 24 minus any withholdings and credits you had.  Unless you are 100% sure, you will have the same withholdings and credits, it is safer to go with line 24.  Now, if you have a regular W2 job along with self-employment income, you can deduct what your employer will withhold from line 24 to decide how much you pay.  

As for paying without the Magic 8 ball.  You can absolutely do that.  Depending on what type of job you have, you could use something like QuickBooks self-employed to track your income and expenses, then at the end of the quarter it will tell you how much you owe with what you made.

You can also manually do it by using the amount you make in a quarter, then figuring out your regular income tax on that amount plus 15.3% for your Self-Employment taxes. You would want to use this chart to determine your normal rate.  

For example, if you earn $25,000 in the first 3 months of 2023.  You would need to base your numbers on $100,000 when calculating your taxes. So your tax for the year would be $14,767(Ordinary Income Tax) +$15,300(SE) =30,067.50.  You would then divide that by 4 and send the IRS a payment of $7,517 in April of 2023. 

 But then if the next quarter you earn $50,000, you would pay your taxes based on either $150,000 ((25k x 50K)x 2) or $200,000 for the year plus your SE taxes. Then in the third quarter say you earned $35,000 and 4th quarter you earned $20,000.  For the third quarter you would base your payments off of $145,000 ($110k earned so far plus a guess of $20K for the next quarter)  Your 4th quarter payment would consist of either a catch up or lower payment.

Basically, as long as you are making the payments based on what you earned in that quarter, you will be able to avoid penalties and interest as you can then file form 2210 to show your payments were based on the quarter you paid.

So, in reality, there will always be a little guessing, but you can file based on what you earned for the quarter you are paying. 

[Superfly]

I opened up the PDF I saved of my 1040 for 2022 for the first time today and noticed on the first page is a section for estimated payments for 2023. It lists out four voucher numbers and the respective date and amount due for each voucher.

Regarding my last post about which line item from form 1040 to use as an estimation basis, it's interesting that TT went with the lower number (line 37) divided by 4. This value is 1/4 of what I would pay using line 24 divided by 4. However, I chose to error on the side of caution and followed Vanessa's advice and pay the higher value. Actually, I paid a little more as I figured the following approach would be the most conservative:

I have setup a spreadsheet that allows me to enter the amount of money I make each quarter and then calculates everything. I'll share an example of how it breaks down in case my (what I think is an ultra conservative) approach is helpful to other people who want to play it safe.

Q1 income is $20,000.

$20,000 x 4 = $80,000 (estimated annual income)

2023 married filing jointly tax table shows 12% tax rate over $22,000 so….

$80,000 - $22,000 = $58,000 which is multiplied by 12% to get $6,960.

$6,960 + $2,200 = $9,160 (the $2,200 comes from the 10% tax rate on the first $22,000 from the tax table).

$9,160 divided by 4 (to get a quarterly rate) is $2,290.

Now for SE tax…. $20,000 x 15.3% = $3,060.

$2,290 + $3,060 = $5,350 for total tax due for Q1.

Q2 income is $10,000

Q1 + Q2 ($20,000 + $10,000) then multiply by 2 = $60,000 (new estimated annual income).

$60,000 - $22,000 = $38,000 which is multiplied by 12% to get $4,560.

$4,560 + $2,200 = $6,760.

$6,760 divided by 4 (to get a quarterly rate) is $1,690.

Now for SE tax…. $10,000 x 15.3% = $1,530.

$1,690 + $1,530 = $3,220 for total tax due for Q2.

Q3 income is calculated similarly except I add Q1, Q2, and Q3 together, then multiply by 4 and divide by 3 to get the estimated annual income, and then I follow the same calculations as before.

By the time I get to the end of Q4, it’s no longer an estimation and I can just calculate the total taxes due for the year and pay the remaining tax amount on my Q4 payment.

Anyway, this is my first year paying the estimated taxes, so I'll see how it goes using this method. I so badly wish I was only sending in what TT has estimated on page 1 of the PDF I have saved after I filed my 2022 taxes  which is less than 1/4 of what I actually paid for this first quarter. I guess I'll anticipate a tax return next year (which is what I was trying to minimize as I'd rather make money off of the tax money I have set aside).

I wish I knew exactly how the IRS looks at all this. For now, I just don't want to be hit with a penalty for underpayment.

[Superfly]

I have an update to my April post. I was expecting a downturn for Q3 this year (which wound up not being the case thanks to the last few weeks pulling through), so I was playing around with what I thought would be my approximate Q3 income mid-quarter. Anyway, my previous calculation where I adjust the annual rate based on the cummulative quarterly income isn't a bad approach if your income is consistent, but if you have an off quarter, then it's actually a bad method because you wind up paying a lot more in taxes for that "bad" quarter than you need to. For example, if I only made $1,000 in Q3, I would owe around $1,683.00 using my previous method (assuming $20k for Q1 and Q2).

I spent a lot of time looking at different scenarios and found that it's just easier to set aside money at a set rate each quarter based on that quarter's income instead of trying to update my annual estimation each quarter. In my case, since I am on target to be in the 12% tax bracket (married filing jointly), the most conservative approach is to save 26.81% of my income and pay that each quarter. This covers the SE tax and income tax no matter what you make between $22,000 and $89,450 during 2023. My worst-case scenario would have me paying $332.20 over payment by the end of the year (assuming I only made $5,500 each quarter). Granted, I expect to get a portion of of my taxes back due to credits and deductions, but my goal is to not get dinged by the IRS for underpayment throughout the year.

The 26.81% rate comes from taking the highest income in the 12% bracket ($89,450) and dividing it by the total taxes due (SE + income). Other adjustments would need to me made, of course, if my income resulted in a different tax bracket. If I was making $20k during Q1, Q2, and Q3, but then made $100k in Q4, then I would obviously have to use a larger portion of that Q4 income to pay the higher tax rate for my new bracket. Also, if this was the case, I can only guess that the IRS would not penalize me for not paying a higher rate earlier in the year so long as I have documented throughtout the year and provide an appropriate rationale for my "estimation" each quarter.

Any thoughts or input from others, especially if your income varies significantly and/or you have changed brackets by year end?

[VolvoGirl]

You probably know this.......You pay Self Employment tax (Scheduled SE) on a Net Profit of $400 or more on Schedule C in addition to regular income tax on it.   You pay 15.3% SE tax on 92.35% of your Net Profit (If it is greater than $400).  The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare. 

If you end up with a penalty when you file your tax return......

You might be able to eliminate it or at least reduce it.  You can go to Federal Taxes tab or Personal tab, under Other Tax Situations and select Start by the Underpayment Penalties. You will answer a series of questions that may reduce or eliminate the penalty. Or you can elect to have the IRS figure the penalty for you.  It's form 2210.

It's under

Federal or Personal (for Home & Business Desktop)

Other Tax Situations

Additional Tax Payments

Underpayment Penalties - Click the Start or update button