The Beginner's Guide to Navigating & Paying Estimated Taxes in 2023
When I first started my business, I found estimated taxes to be hard to wrap my head around. It was something completely new to me.
Well, that’s actually putting it (really) nicely. Here’s the not-so-pretty truth: I was confused out of my mind and—having been a person that had always received a refund on my taxes—I was freaked out that I not only had to pay taxes, but the amount I had to pay was pretty startling.
Business owners have to deal with enough bushwhacking without having to venture into IRS territory more than they have to! So, let me break down estimated taxes for you . . . in non-IRS speak.
What Exactly Are Quarterly Estimated Taxes?
Most people are familiar with the tax system from an employee standpoint—you have taxes taken out of your paycheck and file your returns by April 15th 2023. However, unbeknownst to you, your employer was secretly doing more tax legwork behind the scenes. Remember that w-4 you fill out when you started a job? It asked how much you wanted to be withheld.
That’s what employers use to figure out how much to take out of each paycheck and send to the IRS. As an employee, you just filled out that form, and you were done until it was time to file your taxes. Your employer, on the other hand, was responsible for setting aside the money for taxes (both your portion and their portion) and paying it in a timely manner.
Now that you’re the business owner, however, you’re in charge of making sure Uncle Sam gets the money he’s looking for. That means you get to pay these things called estimated taxes.
Where Is that Money Really Going?
When it comes to paying your first year of estimated taxes, you’ll probably be surprised at how much of your business earnings end up going to the IRS. Essentially, your estimated taxes are a combination of what you owe for income, Social Security, and Medicare taxes.
To avoid sticker shock, expect that you will pay more taxes now that you're self-employed if you earn the same amount you had as an employee. Why? While you paid income tax out of every paycheck as an employee, your employer paid half of another set of taxes—Medicare and Social Security. Now that you’re the business owner, Medicare and Social Security taxes are 100% your responsibility.
So, how much more do you pay as a business owner? The Social Security and Medicare taxes (fondly referred to as self-employment tax) you now have to pay in 2023 is 15.3% of your adjusted gross income (that is, your income after deductions/exemptions).
You could very well owe 25% of your earnings or even upwards of 40% depending on your income bracket and state tax levels.
This 15% self-employment tax is above and beyond the income tax you've always paid as an employee. That, my friends, is why you should prep yourself for sticker shock. You could very well owe 25% of your earnings or even upwards of 40% depending on your income bracket and state tax levels.
Amidst this depressing news, here’s a bright spot to keep in mind. Remember that you get to deduct half of your self-employment taxes when you file. Small joys, people. That’s all we can shoot for. :)
How Do You Know How Much to Pay?
Now that you know what estimated taxes are, how in the world do you figure out how much you owe? Good question.
You can take one of two approaches:
1. DIY method
If you’re brave, you can fill out the 1040-ES worksheet and that will help you figure out your estimated quarterly taxes. As the IRS states so casually, “To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.”
Uh… yeah. I’ll get right on that.
2. The Better Way
I’m a total DIYer (as are many entrepreneurs) but seriously, we’re in travel. I think it’s safe to say that our love of crunching data is not why we got into the biz. My advice? Find a good tax advisor and become best friends.
Mine charges $75/hr and she is worth her weight in gold. Kinda like how travel agents are worth their weight in gold when you find the right one. ;) We chat with a travel-industry-specific CPA in our travel agent travel expense article if you want a launching point for your search.
While the lion’s share of your estimated tax payments will go to the Feds, remember you may also need to pay in estimated taxes to the state.
When Are the Estimated Taxes Due Dates?
You pay estimated taxes four times a year (quarterly). The due dates may vary by a few days every year due to weekends but typically you pay in on the 15th of April, June, September, and January.
They made it easy for you in 2021! Same date every quarter:
- 1st Quarter: April 18, 2023
- 2nd Quarter: June 15, 2023
- 3rd Quarter: September 15, 2023
- 4th Quarter: January 15, 2024
We want to help you with precious brain space . . . sign up below to get quarterly tax reminders from HAR!
How Do I Pay My Estimated Taxes?
There are a couple of ways to pay your federal quarterly estimated taxes:
Visit www.directpay.irs.gov (easiest) or www.eftps.gov/eftps and set up online payments. Want more details? Here's more info on paying your quarterly estimated taxes online.
If you want, you can apply your tax refund to future quarterly tax payments. There's no right or wrong answer. It just depends on what you prioritize . . . getting your payments out of way early, or making sure that your tax return marinates in your bank account to earn as much interest as possible.
2. Snail Mail:
The IRS does not recommend paying your taxes by mail. At every turn, they warn against it. To make matters more complicated, they warn you not to use the address shown in the Instructions for Forms 1040 and 1040-SR. Weird and 100% counterintuitive.
The address you need to send your estimated tax payment will vary by state and by form. Read up here for more details on how to find the correct address for you.
If you’re dying to talk to someone at the IRS (weird, but to each their own) you can call in your payment. Here’s a link to more info on paying by phone.
All of the above pertains to the federal estimated taxes. When it comes to how you can pay at the state level, you’re going to have to do a little digging on your state’s tax site.
How Much is the Estimated Tax Penalty if I Underpay?
Right now, for the tax year 2021, it's directly tied to how much you underpaid. Now, finding the exact amount for how much you owe? Good luck on that one.
There isn't really an estimated taxes penalty calculator but you can figure it out a few ways:
1) Read the IRS’ overly-complicated explanation on figuring out the penalty for underpayments, complete with links to their just-as-confusing Form 2210.
2) Contact your tax advisor. (Cue confetti falling from the ceiling and yacht-rock music)
Download HAR's Tax Organizer!
You know we like to go the extra mile :) Below is a beauteous Tax Organizer to help you get your ducks in a row. The form includes travel-agent-specific categories from general office expenses, to travel expenses. Take a look (then download it below!)
Interested? You can subscribe and download below!
Free Tax Filing?!
The IRS is offering a Free File program for individuals or households with an annual income of $73,000 or less.
Now, I'm going to depart a bit from quarterly taxes, but it's for an important reason. As of Jan. 2022, the IRS is offering a "Free File" program for individuals or households (depending on how you file) with an annual income of $73,000 or less. The program provides free use of 8 different tax filing programs to file your annual federal taxes. Even better? Some filing programs include state filing as well.
Not too shabby!
That Wasn't So Bad, Was It?
I'm not a tax expert but I am a business owner that wished I'd had a guide to navigate estimated taxes my first time around! So, while I'm waiting for the snow to melt here in Minnesota, I decided to write up a guide on estimated taxes—I hope it helped! If it did, I'd love it if you'd give it a like/share or share your experiences below. If you've found this article helpful, I think you might really like our newsletter!
Editor's Note: This article was originally published March 3rd, 2014. We update this article annually with the latest information on estimated taxes. The article was most recently updated and republished on date listed above.