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Quarterly Estimated Tax Payments
Are you a freelancer, small business owner, or investor? This means you are most likely an individual or business that doesn’t have taxes automatically withheld from your income. We wrote this article for you!
What are estimated tax payments?
Estimated tax payments are the tax you expect to owe for the current tax year after you subtract the credits you plan to take.It is called “estimated” because the numbers used for this tax are either taken referencing the prior year or estimated from the current tax year.
Typically they are calculated by figuring your expected adjusted gross income, taxable income, taxes deductions, and credits for the current year utilizing Form 1040-ES. However, a good place to start is using your current year as mentioned.
When do I have to pay estimated tax?
As in the beginning paragraph, if taxes are automatically withheld from your income, then paying estimated taxes are a good idea. We will explain more later. Traditionally this includes, freelancers, sole proprietors, partners, S corporation shareholders, and any individual who expects they will owe a tax of $1,000 or more when their return is filed.
Estimated Tax due dates take the year and divide it into four payment periods, that is why estimated taxes are sometimes referred to as quarterly tax payments or quarterly estimated tax payments.
Why does it matter if I pay quarterly estimated taxes?
The most important reason is to avoid penalties. Underpaying taxes quarterly can add up and lead to a significant amount of money owed by the end of the year. We don’t want you to pay the IRS any more than you owe.
Secondly, keeping up with your quarterly estimated tax payments allows you to better manage your cash flow. Paying smaller payments throughout the year is usually healthier for your business than having to make a large payments during tax season/at the end of the year.
Third, you stay in compliance with the tax law. The U.S. tax system is a “pay-as-you-go” system meaning that you are expected to pay taxes as your income is earned. So by paying your quarterly estimated taxes on time- you reduce the risk of IRS audits or further scrutiny.
Fourth, not only will you be avoiding penalties, but also interest. If you owe more than $1,000 in taxes after your estimated taxes, then you may be expected to pay interest. Paying estimated taxes on time will reduce the likelihood of accruing these charges.
Finally, paying quarterly taxes keeps you more disciplined about setting aside the funds to cover your tax liability. This helps you budget more accurately and be better prepared.
How to pay quarterly estimated tax payments?
You can mail your tax payment with Form 1040-ES or pay online. Using the electronic way to pay the taxes is the most convenient. You also have the option to pay weekly, bi-weekly, or monthly as long as you’ve paid enough by the end of the quarter. The online system allows you to view a history of your payments.
Help with Quarterly estimated tax payments:
Our tax experts can help you determine your estimated tax and provide reminders each quarter. If you would like to get connected to this service, please contact: emma@1826pfs.com with the subject line: Estimated Taxes.
For more details straight from the IRS, click here.