007 - Do Drag Professionals Need to Pay Quarterly Taxes?

On this episode of the podcast I dive into lesson 3 of my multi-part series where I share tax basics and legal fundamentals. Today's episode covers quarterly taxes and how to know when you are responsible for paying them. 

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πŸ€“ Get a free copy of my bookkeeping template

πŸ“˜ Grab a copy of the book 

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If you missed my intro episode, Part 1, or Part 2 of the series,  take a pause and go back and watch those as all these episodes build on each other. 

Quarterly taxes, also known as estimated taxes, is the concept we should be paying taxes throughout the year instead of waiting until tax day to pay a lump sum. The government wants its money and it doesn't want to wait, especially due to the time value of money and inflation. 

If you don't pay quarterly, you will owe penalties and interest. The rule says you βœ… must pay quarterly taxes if you expect to owe at least $1,000 in taxes and βœ… you expect your withholding and refundable credits to be less than the smaller of 90% of the tax owed or 100% of the prior year tax. 

To see a visual breakdown of an example, check out my YouTube channel. In our example, our taxpayer owed $9,000 in taxes for the prior year. This person has a fulltime job where they make $60,000 a year and taxes are withheld automatically from your paycheck at a rate of 20% which comes to $12,000 in withholdings. On top of the job, they have a freelance income of $50,000 with no cost of goods so gross profit is $50,000. With expenses of $20,000, that comes to a profit of $30,000. 

With $60,000 employment income and business profit of $30,000 is a $90,000 total income. In our previous video we talked about our standard deduction, other tax benefits, etc. For this example, assume they have an effective tax rate of 15%. 15% of $90,000 is $13,500 (this is over $1,000 so βœ…). Is the withholding to be less than then smaller of 90% of the tax owed or 100% of the prior year tax. 100% of the prior year tax was $9,000 and 90% of the tax owed ($13,500) is $12,150 ($12,000 withholdings < $12,150 so we are not required to pay quarterly taxes. 

My general rule of thumb is if you expect to have a profit in your freelance or busines income then you should pay quarterly taxes. The reason I give this rule is because I see people get in trouble not paying quarterly taxes and they get into an Oh Shit cycle of back taxes trying to make money to pay the back taxes and save for current taxes. 

Failure to pay taxes leads to penalties, which you can learn more about in my book.

An example of failure to pay is if you have $100,000 and a 20% tax rate, she should pay $5,000 per quarterly estimated payment. Assuming none of these quarterly payments were made but were made as a lump sum on tax day April 15, her first quarter payment is a year late, the second payment 10 months late, third payment 7 months late and fourth payment is 3 months late. The penalty is .05% per month. This brings this total penalty (in a very simplified calculation) to $800. 

Get access to my Quarterly Estimated Tax Calculator  with my Drag Tax Basics Course or with a copy of my book. My course includes a free 15 minute 1:1 call with me to go through the quarterly tax estimation guide together. 

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