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What Physicians Need to Know about Quarterly Estimated Taxes

Side gigs and other alternative income streams are a great way to bring in additional income. Often, physicians find side gigs where they are paid as 1099 independent contractors, or where they are in partnerships that pay out and report on a K1. You may also be receiving income from other sources such as rental properties. This can offer some great advantages in the form of tax deductions, but it also adds an additional layer of recordkeeping and accounting. The same is true for 1099 physicians in their primary clinical role. As a 1099 contractor, the company you work for isn’t required to withhold estimated income taxes from your payments, which means this responsibility falls onto you in the form of quarterly estimated taxes. Another situation where you may underpay your taxes is if you are in a dual high income family where your earnings fall into a higher tax bracket than your employer may expect based on your earnings alone.


Unfortunately, the IRS does not want to wait a whole year or more (depending on your tax deadline and extension) to receive the money it is owed in taxes on your earned income. Failure to properly calculate and make payments to the IRS can result in hefty penalties and interest come Tax Day the following year, which can be a shock to physicians with side gig income for the first time.


Below, we cover what physicians need to know about quarterly estimated taxes, including requirements for filing estimated taxes, when they are due, how you calculate them, ways to pay them, and how much grace you have before penalties kick in.


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Who has to pay quarterly estimated taxes, and ways to pay them


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Additional Tax Resources for Physicians


For a more in-depth look at self-employed finances and taxes, check out these additional pages:



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How Taxes Work in the United States


In the United States, we have a pay-as-you-go tax system, which means you are expected–and required–to pay federal taxes on your income as you earn your income. If you have a state income tax where you live, the same will be true on the state level for income tax.


For W-2 physicians, your employer automatically withdraws your estimated taxes from your gross earnings and sends the withheld taxes to the IRS on your behalf for you. The W-4 form you fill out when starting a new job helps your employer determine how much to withhold.


You’ll notice these as deduction line items on your paystub in the form of:

  • Federal income tax withheld

  • Social security tax withheld

  • Medicare tax withheld


These taxes can add up significantly, which is why graduating residents and fellows transitioning into practice often get sticker stock when they receive their first attending paycheck.


Your employer regularly reports your total W-2 income and withholding to the IRS, so that your tax payments are credited against how much you owe. You will also receive your W-2 at the end of the year, which summarizes what income and withholdings they’ve reported and sent.



What Are Quarterly Estimated Taxes?


If you’re paid as a 1099 independent contractor and not as a W-2 employee, your employer does not have to withhold any taxes for you. Instead, you will receive the gross income you make, unless you have the option to and choose to have taxes withheld. The same is true for most other types of taxable income in the United States.


In this case, you are responsible for sending your estimated tax payments into the IRS yourself in a timely manner in the form of estimated tax payments. The IRS tracks estimated taxes on a quarterly basis (see below for a slight variation in Q2 versus a normal calendar quarter schedule). If you don’t calculate how much tax you’ll owe and submit it to the IRS by the deadline, Uncle Sam comes knocking with penalties and interest for late tax payments.


This can be a shock for new attendings and seasoned physicians alike who find themselves with substantial income for the first time where taxes aren’t automatically withheld and deposited for them, or after a major life change such as marriage when your tax brackets may change depending on the combined household income instead of just your earnings.


Who Owes Estimated Tax Payments


If you’re only making a few dollars in interest for your savings account, you likely don’t have to worry about quarterly estimated taxes. But if you’re making thousands a year on your emergency fund or future home down payment parked in a high-yield savings account, you’ll want to start paying attention so you don’t get to the end of the year and find out you’ve under withheld taxes.


The same is true for our entrepreneurial physicians with side gigs. If you only do a few paid medical surveys a year and net a few hundred bucks, you likely don’t need to bother with the hassle of estimated taxes. But if you’re one of the physicians in our Facebook communities that brings in five-figures of additional income through medical surveys or any other physician side hustle, you’ll want to make sure you are covering your quarterly taxes owed on this money.


Another common situation where paying estimated taxes is necessary that we encounter in our communities are physicians who are in dual high income families. Because your employer will by default withhold taxes based on your income alone, you may end up under withholding compared to your marginal federal tax brackets based on both incomes. As of a few years ago, there are now ways to mitigate this scenario.


Generally, you are required to make estimated tax payments if you expect to owe more than $1,000 in tax after subtracting your automatic withholdings and tax credits on your tax return.


If you run a business, estimated tax payments apply the same to you as for our side gig and 1099 physicians. The only difference is if you are a corporation, you have to pay quarterly estimated taxes if you expect to owe more than $500.


If you have paid at least 90% of the tax for the current year, or 100% of the tax shown on your return for the previous year (whichever is smaller), then you will not owe a penalty come tax time in April. This math can get complicated, but we look into how to calculate your quarterly taxes below.


Types of income you should assess when determining if you need to pay quarterly taxes include:

  • Self-employment income

  • Business income

  • Income your spouse (even if W2!) makes

  • Interest payments outside of sheltered retirement accounts

  • Dividend payments outside of sheltered retirement accounts (even if they are reinvested)

  • Retirement payouts, unless in a Roth account

  • Capital gains outside of sheltered retirement accounts

  • Alimony


8 income sources to consider for estimated taxes

Dual-Income Physician (or Other High Earner) Households


You’ll note above that you may need to consider making estimated taxes if you and/or your spouse are high-income earners, and you have a dual income household. This is a situation a lot of our physician members find themselves in without realizing it.


A few years ago, the IRS updated the Form W-4 and created an online withholding calculator to help assist individuals with multiple jobs or families where both spouses work. This online withholding calculator can help you adjust your withholdings from your W2 salaries to help avoid having to pay estimated taxes.


Pay close attention when completing your W4 form for your employer when changing jobs, especially Step 2: Multiple Jobs or Spouse Works. It’s easy to overlook and not account for, but this can leave you in a mess come tax time.


If you don’t withhold additionally to account for your higher marginal income bracket as married filing jointly, and you don’t file estimated taxes, you will likely find yourself owing taxes come Tax Day, along with penalties and fines


If you get married during the year, you should also double check your withholding, as you may need to play catch up, depending on the financial situation of your newly combined household income. An accountant can help you evaluate and determine the best step forward if you need help navigating the change.


If you’ve been at your job for a few years, it can be worth double checking the withholding information you have on file, as employers were not required to change information currently in the system when the IRS updated the form. If you’re already paying quarterly estimated taxes, just make sure you don’t double withhold on your W2 income, as you don’t want to loan the IRS a bunch of money tax free either!



How to Calculate Quarterly Estimated Taxes


The IRS provides Form 1040-ES as guidance for quarterly estimated taxes. (If you’re a nonresident physician here on a waiver or visa, you will use Form 1040-ES(NR) instead.)


As mentioned above, this math can get pretty complicated. If you’re a DIYer, you’ll likely need an Excel spreadsheet with more than your fair share of equations to help calculate and determine how much you owe.


For busy physicians, hiring an accountant to help with your quarterly taxes, especially if your 1099 income is variable and changes drastically each quarter, can be well worth the added cost to avoid taxes and fees, as well as communications with the IRS, if you underpay your taxes.


To determine how much you’ll need to make in estimated payment, you’ll need to determine your expected amounts for the year for your:

  • Adjusted gross income

  • Taxable income

  • Taxes

  • Tax deduction

  • Tax credits


Make sure you include your total household income of all your income sources if married and filing jointly, as marginal tax rates are based on your filing status.


Learn more about marginal tax rates.


If you have a steady, knowable income, such as a set number of shifts/hours you work for your physician 1099 job, this can be easy to do. Using last year’s return or reviewing your contract for this year may give you all the information you need as a reference.


If you pick up multiple side gigs throughout the year like moonlighting and consulting, plus medical surveys, or work 1099 on a performance-based model, your adjusted gross income may be a constantly moving target that comes in at different frequencies throughout the year.


Ideally, the IRS has you calculate the total amount of estimated taxes you will need to make and divide them by four. On a very high level view of a simple situation, you can determine estimated taxes by:


How to calculate your quarterly estimated taxes

Simple when you have a single, steady income flow, but difficult when your income fluctuates heavily or you have to consider multiple income sources with and without taxes already being withheld. This is again where an accountant can be a very useful resource.


Use the worksheet on the Form 1040-ES to help you figure out your estimated tax liability for your quarterly payments.


As a very general rule, many recommend setting aside 25-35% of the income that comes in without withholdings depending on your tax bracket. That way, at the end of every quarter, you won't find yourself with a huge estimated tax bill due to the IRS and without the money to pay estimated taxes because you've already spent or invested that money. A short-term investment option such as a high-yield savings account or money market account is a great place in which to tuck the taxes away as the money comes in. Just make sure you check account transfer and transaction limits.


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How to Pay and File Your Quarterly Estimated Taxes


There are a few different options, depending on your situation and other sources of income, to pay your estimated taxes.


Additional Withholding From Other Income Sources


The easiest with potentially the least amount of headache and paperwork is to voluntarily withhold additional taxes on your primary job if you have a W-2 income source as well. If you are married and file jointly, you can also withhold additional taxes from a W-2 income source your spouse has. If you are both W-2, the easiest way may be to take the additional withholding from the highest earning W-2 paycheck.


To do this, coordinate with the HR department or the online pay platform. You will need to know what additional withholding amount they need to withdraw, so make sure you review the Form W-4 ahead of time or use the Tax Withholding Estimator.


This works well if your self-employed or other taxable income is relatively steady over the entire year or is smaller in total amount. If your self-employed income varies greatly quarter by quarter, it will be more difficult to adjust your W-4 to withhold from your W-2 wages as you will have to continually check and update your additional withholdings.


You can also select to have voluntary withholding (typically not withheld by default) on other types of income streams such as annuities, pensions, IRAs, social security income, and dividends. Again, this is best in situations where you have a predictable and somewhat steady income stream that you need to withhold taxes for.


Regular Quarterly Estimated Taxes


To calculate and file your estimated taxes, you can use Form 1040-ES by mail or you can pay online or via phone via various methods delineated in the How to Pay Estimated Taxes section of this page on the IRS website. A lot of people like using the Electronic Federal Tax Payment System (EFTPS) online, which is convenient and provides clear tracking of all payments made.

You can make quarterly estimated tax payments on whatever cycle is the most convenient for you and easiest to remember so you don’t forget to make a payment. Common schedules include:

  • Weekly

  • Bi-weekly

  • Monthly

  • Quarterly


The IRS doesn’t care when during the quarter you make your estimated payments, so long as you’ve paid enough by the end of each quarter.


When Estimated Tax Payments Are Due


To avoid penalties, estimated taxes must be paid by their due date and for the required amount. Estimated tax payments are due on:

  • April 15th for income earned between January 1st and March 31st

  • June 15th for income earned between April 1st and May 31st

  • September 15th for income earned between June 1st and August 31st

  • January 15th (of the following year) for income earned between September 1st and December 31st

Deadlines for quarterly estimated tax payments

Exception to note: If the due date falls on a federal holiday or weekend, the payment will be due the following business day.


What to Do If You Miss a Quarterly Tax Payment


If you miss the deadline for a quarterly estimated tax payment, make the payment as soon as possible. Do not wait until the next quarter to make them up, as the IRS assesses underpayment tax penalty by when you paid. The longer you wait to make up a missed payment, the more you’ll pay in penalties.



Conclusion


Quarterly estimated taxes are a necessary evil of being self-employed. The IRS is strict about when payments are made, and assess penalties based on how late you pay them, so don’t wait until you’re doing your tax return to sort out how much you owe for the year. By then, you’ll have penalties for the first three quarterly estimated payments you failed to make.


When in doubt, work with a qualified accountant, especially your first year as a self-employed physician or small business owner.

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