Taxes, as always everyone’s favorite topic. Did you know that when you’re self-employed you’re supposed to pay them every three months (aka your quarterly taxes)? Unlike everyone else it’s not a once a year thing for you.
Why do you owe quarterly taxes?
There’s actually a good reason for owing quarterly taxes. When you’re working for someone else they’re taking a portion of what you owe out of each paycheck. This gets the IRS their money sooner and it prevents you from owing a huge amount come tax time. When you’re on your own well… you’re on your own on the taxes side as well! We’re a pay as you go tax system so you are supposed to pay your taxes as you make income. A common refrain in the tax world is you either pay now or pay later.
Normally I’d be all for deferring payments to the IRS when possible but in this case there are some good savings and business reasons to pay.
Why should you pay your quarterly taxes?
There are two main reasons to pay your taxes quarterly. The first is to avoid a tax penalty. If you’re self-employed and you owe at least $1,000 in taxes you have a chance at paying a penalty. You can avoid that penalty by paying 90%+ of your estimated owed taxes.
While there’s a somewhat complex formula to calculate your underpayment suffice it to say you’re looking at 3-4% of what you owe per quarter. So if you owed $10k at the end of the year you’re looking at an extra $400 owed to the IRS. Not bank breaking but still expensive! Reach out to Ernest Jones if you need help figuring this stuff out; he’s a Twitch focused CPA.
The second is for a business reason. If you’re tracking your income and expenses well enough to pay quarterly taxes then you’re also in a good position to actually know how business is doing. This will help you make projections of future earnings, plan out long term projects, and just in general be happier with more knowledge.
When do you owe quarterly taxes?
You owe quarterly taxes on April, June, September, and January (following year) 15th unless one of those days falls on a weekend or a holiday.
For instance, for 2018 the actual dates are April 17th, June 15th, September 17th, and January 15th (of 2019).
How do you calculate your quarterly taxes?
This one’s a bit more complex. First, check out this article on some of the basics of calculating your taxes. Since this article is coming out in 2018 I’m going to use 2018 numbers in my example.
First, if you’re comfortable reading instructions on an IRS worksheet the relevant one is here.
If not, here’s a brief example from walking through the worksheet:
Susie Streamer expects to earn $50k from her stream. Between paying for cons, merchant fees on tips, upgrading some of her equipment, subs to other broadcasters, and all of the miscellaneous expenses that go in to running a business she expects $10k in business expenses.
Her $40k in net income yields a $3,169.50 self-employment tax deduction. After the $12k standard deduction her $28k of taxable income yields an income tax of $2,825.91 for a combined estimated tax burden of $5,995.41. Cut that into quarters and she should pay $1,489.86 in estimated taxes for the first quarter.
See why it’s important to track what you’re earning and spending to project it out? These kinds of calculations are annoying enough to earn when you have a good estimate of your income. When you don’t, it’s way harder. Even if your estimates end up being off you can adjust later in the year to keep your payments on track.
If you’re earnings aren’t going to vary too much from the prior year and you still want to make some payments so that you don’t have a large payment come 2019 tax time, then you can take the amount in total taxes that you paid for the 2017 tax year, divide by 4 (or at the time of this publication, divide by 3) and that gets you in the ballpark. While calculating the estimate is more of a science, determining how much you want to pay in conjunction with that information is an art because you may be juggling cash flow issues at the same time. The best practice is to pay what you can quarterly so that you are not constantly kicking the can down the road.
Alternatively, you pay someone to help you with it.
How do you pay your quarterly taxes?
Do it online. Come on now.
Conclusion
Quarterly taxes are an important thing for streamers. It helps you avoid paying potentially large tax penalties at the end of the year, spreads out the pain of your taxes so it’s not a huge kidney punch in April, and helps you figure out your business stats. With a little time and effort spread out over the year they aren’t that bad.
You don’t have to figure this out alone. This is what we do- help streamers make great money decisions. If that’s something that sounds interesting to you reach out me or schedule some time for a free consult. You can check out what I do here. I’m not an accountant but my job is to find these kinds of opportunities and connect you with the people who can do the calculation work.
Again, that’ll be Ernest Jones. Pay the dude and make your life so much easier!
