Estimated Tax Payments

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If you’re self-employed or owe more tax than was withheld from your earnings, you may need to pay quarterly estimated tax payments.

Income not subject to withholding (self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes and awards) is paid by making quarterly tax payments to the fed.

If you will owe taxes of this sort you must make estimated payements by the quarterly due dates to avoid penalties.

How To Pay

The easiest way to pay is by using The Electronic Federal Tax Payment System (EFTPS). Just enroll online, enter your payment information, and have payments directly debited from your bank account.

Be sure to enroll a few weeks before your estimated payment is due because it will take the IRS a week or so to get your login PIN to your mailbox.

Estimated Tax Payments

To figure your estimated tax amounts (and to pay manually), use Form 1040-ES.

Who Needs to Pay

Any sole proprietor, partner, S corporation shareholder, or self-employed individual expecting to owe more than $1,000 in tax at year end will need to file and pay estimated tax.

How Much To Pay

They’re called “estimated taxes” because you must estimate how much you’ll owe based on expected earnings, deductions, and credits at year end.

If you’re confused or overwhelmed by estimating these numbers, don’t worry, just grab last years return and use it to guide you. Plug those numbers into the 1040-ES worksheet to calculate estimated tax due and figure quarterly payments. If your business is new just estimate the best you can and make adjustments as necessary.

Keep your estimates as accurate as possible to avoid penalties, but don’t worry about estimating perfectly; if you’re too high or low just complete another 1040-ES worksheet and adjust your amounts for the next quarterly payment.

Quarterly Payment Due Dates

Note: if you’re planning to use EFTPS for the first time, enroll a few weeks before the first payment due date so the fed has time to send your PIN via snail mail.

Estimated taxes are paid quarterly throughout the year and are due on the following dates:

  • April 17th, 2012
  • June 15th, 2012
  • September 17th, 2012
  • January 15th, 2013

Pay enough tax (typically 25% of total tax due for the year) by the due date of each quarter to avoid penalties.

You can also pay your entire tax bill on the first quarterly payment due date if you’d rather just get it all over with. I recommend paying quarterly so you can keep the money liquid and/or draw interest on it as long as possible.


References and Resources

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1 Kevin

Despite the $1000 guideline, readers might want to know that you DO NOT have to pay estimated tax for the current year if you meet all three of the following conditions:

– You had no tax liability for the prior year
– You were a U.S. citizen or resident for the whole year
– Your prior tax year covered a 12 month period
(Source: IRS Pub 505)

2 Matt Jabs

Thanks Kevin.

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