Quarterly Estimated Taxes for Sole Proprietors

If you're a sole proprietor, that is, you solely own an unincorporated business, the federal government requires you to pay income taxes each quarter. That's right: Instead of filing taxes once a year, self-employed individuals send estimated tax payments to the Internal Revenue Service four times a year.

Many new business owners are overly anxious about quarterly taxes, but as long as you get sound advice from a tax professional and play by the IRS's rules, you have nothing to worry about. Here are some of the most common questions individuals ask about estimated taxes.

Do I have to file taxes quarterly?
If you're a sole proprietor, the answer is most likely yes. The IRS expects self-employed individuals to pay federal income tax throughout the year, and if you don't pay estimated taxes each quarter, Uncle Sam can charge you interest and impose nonpayment penalties. As long as you earn income in a given quarter, you owe tax for that quarter.

Which taxes do I have to pay?
You must pay federal income tax, along with Social Security and Medicare taxes, known collectively as self-employment tax. Ordinarily, employers and employees split Social Security tax, but when you're self-employed, you must pay the full tax yourself. The amount of federal income tax you pay is based on your adjusted gross income. The current self-employment tax rate is 15.3 percent on the first $102,000 you earn and 2.9 percent on income above $102,000. Depending on where you operate your business, you might also be subject to state and local taxes.

How do I determine my payments?
Tax laws change frequently, but this year, sole proprietors who earn less than $150,000 should pay a total of 90 percent of the tax they expect to owe next year or 100 percent of the federal tax they paid last year, whichever amount is smaller. Individuals whose adjusted gross income exceeds $150,000 (or $75,000 if they filed a separate return from their spouse) must pay either 90 percent of the tax they expect to owe next year or 110 percent of the federal tax they paid last year, whichever amount is smaller. Once you determine your total tax for the year, divide the amount into four equal payments to come up with the amount owed each quarter.

All sole proprietors should read IRS Publication 505: Tax Witholding and Estimated Tax.  It contains detailed information on estimated taxes and a handy worksheet to help you determine how much your estimated payments should be.

Ultimately, the best way to estimate your quarterly tax payments is to let an qccountant or a tax advisor do it for you, especially if it is your first year in business. A tax pro can help you assess what you owe and help you minimize your tax liabilities and avoid costly missteps and underpayment penalties.

When do I file?
Federal quarterly estimated tax deadlines are April 15, June 15, September 15, and January 15. When these dates fall on Saturdays, Sundays, or legal holidays (when the IRS offices are closed), the payment is due the next business day. State and local taxes are usually due on or around the same dates.

Which tax forms do I use?
You file quarterly taxes with IRS Form 1040-ES. You can download the form on the IRS's Web site, pick it up at your local IRS office, or call 800-TAX-FORM. After you file, the IRS will set up an account for you and send you preprinted 1040-ES forms and payment vouchers. To get state income-tax forms and payment information, go to the Federation of Tax Administrators' Web site.

Where can I get more information?
The IRS Web site has all the information you need, although sometimes it can be difficult to find. For live help, call the IRS direct at 800-829-1040.