(Guest post by the folks at Outright – my new favorite product!! I use them to manage and track all my business money, and I can’t tell you how many hours they’ve saved me so far – I’m a huge fan :))
Man, selling online and freelancing is awesome, isn’t it? You get to set your own hours, don’t answer to anyone, plus you don’t have to get mad at someone because you clearly have a sign marked “Bathroom for Customers Only” but they used it anyway. Some days it’s tough to think of reasons to be upset about your life.
That is, until quarterly estimated taxes come around. Day ruined.
If you don’t know what quarterly estimated taxes (QETs) are, then you’re either new or in for a rude awakening. See, the United States has what is known as a “pay-as-you-go” income tax. If you have a regular W-2 job, then you’ll lament over those taxes taken out of every check. But the self-employed truly have to do everything themselves – even take taxes out of their own paychecks. For this reason, every few months self-employed people are required to send in a payment to Uncle Sam. And you have to figure out the amount for yourself and send it in on your own. If you don’t, you’ll be in for a huge surprise come April!
But don’t worry – if this is the first you’ve heard of these things, we’re here to help. Read on for the what, when, and how of these accursed tax payments!
What are quarterly estimated taxes?
QETs are certainly a pain, but they do make some sort of sense. If you worked at an office, you would have your taxes taken out from each paycheck. Your individual sales through your online store or jobs you do for your freelance business don’t have any taxes taken out.
However, you still owe taxes to the government! So every quarter you have to dip into your accounts and send a percentage out. If you don’t, you owe even more during tax time in April as you’ll be hit with fees for failing to “pay as you go.”
When are quarterly estimated taxes due?
QETs are quarterly payments, so once every few months they’ll sneak up and tap you on the shoulder. However, if you know what the dates are beforehand you’ll be way more prepared.
- Quarter 1 just passed in April; your first quarterly payment was due the same day your federal taxes were due. The remaining three dates for the business year are:
- Q2: June 15, 2012 (flying up soon!)
- Q3: September 17, 2012
- Q4: January 15, 2013
Then the fun starts all over again in April. If you haven’t started on your Q2 taxes, it’s definitely time to at least start thinking about it! (EDITOR’S NOTE: June’s payment is the worst cuz it hits you so quickly after the 1st one of the year in April! I hate it…)
How do I calculate quarterly estimated taxes owed… and pay the darn things?
If you don’t know what to do, though, it’s difficult to wrap your mind around sending a payment to Uncle Sam in the middle of the year. How in the world do you figure out what you owe, anyway? Where do you send it when you do figure it out?
First of all, just like your federal taxes in April, you’ll want to get everything in order. Papers scattered around your office just won’t cut it! If you don’t have a good filing system in place, work on that first. It may feel like you’re wasting time, but you definitely don’t want to miss a vital receipt or bill.
Now, have you ever done a tax form harder than a 1040EZ? If so, you already know what to do. You’ve got to get an adjusted gross income based on how much you made minus expenses. So that means adding up every single receipt from every single sale or job, then taking out everything it takes to keep you in business like materials and bills.
It may be a good idea to work off last year’s tax form. It can give you a better idea how much you’ve made over the last year. After you figure your amount of tax liability from the last year, divide by four and you can get your quarterly payment!
To send in your payment, pick up a copy of 1040ES, the tax form specifically made for QETs, then send the completed form to your nearest IRS tax office. If you’d rather do it online, head over to the IRS’ payment system. One of the benefits of using this system is you can set it up to make automatic payments in the future.
If this seems like too much of a headache (trust us, we know!), Outright.com offers a handy quarterly estimated taxes estimate. Import your bank accounts, PayPal, and credit cards into your free Outright account, then head over to the Taxes tab to check out what you owe. (Keep in mind we can’t predict your tax credits – such as childcare or the earned income credit – so our estimate will err on the side of paying more and keeping you out of trouble with the IRS.)
[J$: I have my accountant figure out all this stuff for me, but I STILL track everything through Outright and keep all paperwork filed away too as back up...]
If you have more questions, you can also check out our own Q&A section on our site, or head over to the Outright Community to ask for help from our expert accountants about your specific situation. Taxes are a necessary evil, but one you can conquer. Now let’s get this over with so you can get back to what you do best… running your business!
Guest post by the team at Outright.com, the easiest way to manage your small business finances online – automatically (and free)!
[EDITOR'S NOTE: Remember earlier this year when it took me days and DAYS to get everything prepared for taxes last season? Well as of now I have ZERO work to do for this year's taxes so far cuz I literally check Outright once or twice a month :) I keep all paperwork needed, etc in my filing drawer, but everything is now tracked online rather than in my crappy spreadsheets I'd been using for years - it's awesome! And they're officially in my list of kick-ass product recommendations ;) ]
(Photo by ColumbusCameraOp)