Updated for tax year 2023.
If you are a taxpayer who makes quarterly estimated tax payments to the Internal Revenue Service (IRS), you probably determine how much you should pay each quarter at the beginning of the year. You may have even used TaxAct® to estimate your tax payments and print vouchers.
However, as a self-employed person, small business owner, freelancer, or independent contractor, your income and expenses during the year may not always turn out exactly as planned. You may be having an unexpected banner year and need to increase your quarterly payments, or maybe your business is taking longer to get up to speed than you hoped, and you may not need to pay as much as you thought.
Let’s look at how you can adjust your self-employed estimated tax payments to prevent underpaying or overpaying your income tax and self-employment tax during the year.
How do I know I’m paying the right amount of estimated tax payments?
Ideally, you should pay at least enough income tax every quarter to avoid underpayment penalties and interest charges. It’s best to calculate your estimated tax payments so they are as close as possible to the right amount for the current year, meaning you’ll owe little or no tax when you file your tax return. But you also don’t want to pay too much, essentially giving the IRS an interest-free loan for months.
If you estimate your quarterly tax liability very carefully, you may need to pay a slightly different dollar amount each quarter. To make sure you pay the right amount of estimated taxes, the most important thing is keeping up with your bookkeeping every quarter — not just at the end of the year. If you continuously track your business income and expenses, estimating your tax liability and the correct payment for each quarter is easier than you might think. For instance, if you overpaid in tax the previous year and anticipate making roughly the same amount this year, you might be able to lower your estimated tax payments this year.
Better yet, when you keep up with your bookkeeping for tax purposes, you’ll have vital information about your business available to help you make good business decisions all year long.
Should I tell the IRS if I want to pay a different amount each quarter?
You don’t need to notify the IRS if you plan to adjust your quarterly payment. You don’t even need to tell them how much you plan to pay. All the IRS cares about is that you send in the right amount for your situation.
The IRS doesn’t pay much attention to your quarterly payments until you file your annual tax return the following year. That’s when they look at your annual income, total tax due, and the amounts you paid each quarter to determine if you submitted enough estimated tax.
How can I make quarterly estimated tax payments easier?
Most self-employed people will agree that the most challenging part of making estimated tax payments is coming up with the money to pay them. Consider setting money aside for estimated tax payments in a separate account as you earn self-employment income. Then mark that account as off-limits for everything besides taxes. Having this separation can help lessen the temptation to spend that tax money in other ways.
Can I get my money back if I overpaid one quarter?
Unfortunately, if you overpay during a quarter, you can’t get that extra money back from the IRS until you file your income tax return. This is one reason why getting your estimated tax payments right is so important.
However, if you greatly overpay one quarter, you may be able to skip the following estimated tax payment altogether. Your minimum quarterly payments to avoid a penalty are cumulative. In other words, if you paid enough in the first quarter to cover both the first and second quarters, you won’t be penalized for not sending a second-quarter payment.
If you or your spouse also earn income as employees and you have overpaid your quarterly estimated taxes, you may want to file a new IRS Form W-4. Doing so can help temporarily reduce your income tax withholding to compensate for the excess quarterly payments you made. However, if you go this route, don’t forget to adjust your Form W-4 back to normal when necessary.
The bottom line
To effectively manage your quarterly estimated tax payments, you need to accurately assess your tax situation and carefully plan to ensure you’re paying the correct tax rate based on your tax bracket. Meticulous bookkeeping will help you avoid overpaying or underpaying, so you aren’t stuck waiting for a tax refund all year or with a big tax bill when you file your federal tax return.