Making quarterly tax payments to the IRS is another part of having your own practice. You'll need to make these payments if you know you'll owe the IRS more than $1,000 in taxes each year. You'll estimate, file, and submit these payments with Form 1040-ES.
If you live in a state with income taxes, you might need to pay quarterly taxes to your state's Department of Revenue as well. Make sure to set reminders for yourself to pay quarterly taxes as there are penalties for not paying on time.
The IRS uses a pay-as-you-go income tax system, meaning you must pay your taxes as you earn income. It enforces this by charging penalties for underpayment if you haven't paid enough income taxes through withholding or making quarterly estimated payments. It also charges penalties on late payments even if you end up getting a refund.
As a self-employed individual, you file an annual tax return but typically pay estimated taxes every quarter. Quarterly taxes generally include two categories:
- Self-employment tax (Social Security and Medicare)
- Income tax on the profits that your business made and any other income
For example, in the 2023 tax year:
- The self-employment tax rate on net income up to $160,200 is 15.3%. That breaks down to 12.4% Social Security tax and 2.9% Medicare tax. As your income increases past this amount, the 2.9% Medicare tax continues but the Social Security portion stops.
- High earners — generally, individuals with earned income of $200,000 and above or married couples with incomes of $250,000 or more — are subject to an additional Medicare tax of 0.9%.