If you’re an owner-operator truck driver, paying quarterly taxes can be a big change from the days when taxes were withheld from your paycheck as a W2 company driver. In fact, unpaid taxes is one of the leading causes of businesses failing. For this reason, it’s important to be diligent about how much money you set aside throughout the year for taxes.
How much should you set aside for quarterly tax payments?
Typically, January through March are often the slowest months of the year for freight cycles. This means that having a big tax payment due at the end of March can be a huge burden. Therefore, ATBS recommends that drivers set aside between 25 and 30 percent of their weekly net income for quarterly taxes. That way you aren’t caught off guard when you have to pay your quarterly taxes after a slow month.
Let’s quickly break down where this 25-30% comes from. Many individuals will fall into the 10-12% income tax bracket. However, self-employed individuals will also need to set aside taxes for self-employment tax (Social security and Medicare also known as FICA). Self-employment tax is roughly calculated as 15.3% of your business net income. So when you take 12% income tax, plus 15.3% self-employment tax, plus your state income tax, you get approximately 25-30%.
ATBS recommends that you create an organizational system for setting aside money for tax payments throughout the year. At the beginning of the year, get all of your paperwork, tax documents, and finances in order to start the year off right. Then, set up an automated system for money to be transferred every week or every month into an account specifically for quarterly tax payments. It may seem like a big change at first, but setting aside money with each paycheck can quickly become part of your routine.
Why is it important to pay your quarterly taxes?
If you fail to pay your quarterly estimated taxes, you may be charged a late payment penalty. If you also fail to timely file your tax return, that’s another penalty tacked on to what you owe. Additionally, the IRS can apply their current interest rate of six percent to your balance due after all the penalties have been added on.
All of this can add up quickly and put you and your business in a financial hole. This is why failing to pay your taxes accurately and on time is one of the leading causes for a business to fail.
How much do you pay?
It is recommended that owner-operators estimate taxes based on actual income since their income can vary significantly each month. Calculating and paying estimated tax payments based on your actual business income will help you avoid overpayment or underpayment of your taxes due.
If you can't pay your entire estimated tax payment all at once, ensure you are at least paying what you can afford. For example, the IRS uses a safe harbor calculation to calculate a minimum quarterly tax payment due to avoid penalties. For simplicity, the safe harbor estimate is your tax liability from last year divided by four equal payments. Each quarter you would pay in one installment of the minimum amount.
While this method may leave you with either an underpayment or overpayment come tax filing time, at least you won’t be penalized for not paying your quarterly estimated tax payments at all.
How do you pay your quarterly taxes?
You can pay your federal quarterly tax estimates online at www.irs.gov/payments or even on the IRS mobile app, IRS2go. Some taxpayers may have an electronic federal tax payment system account (eftps) and those taxpayers can pay quarterly tax estimates at www.eftps.gov. Many states also allow you to make tax payments online. Each state may be a little different, so we recommend visiting your state’s department of revenue website to see how you can make a tax payment online.
You also have the option of applying the tax refund you receive after filing your taxes to the quarterly taxes that will be due in the future. Many owner-operators want their refund right away, but this could be a good way of getting a head start on your upcoming estimated tax payments.
So, should you pay your taxes quarterly?
Technically you have the right to wait and pay your taxes once a year, but is it really worth it? When it comes to taxes, you should be taking small steps towards doing it right rather than handing over more of your hard-earned money by doing it incorrectly.
If you have any questions about paying estimated taxes, call ATBS at 888-640-4829. One of our business consultants or tax professionals would be more than happy to assist you. Not an ATBS client? Give us a call at 866-920-2827 to enroll in our services!
