What Are Estimated Taxes and When Do You Have to Pay Them?
This usually applies in the case of the self-employed and those with significant investment income.
Most people are used to having their employer withhold all of their taxes, and usually this arrangement works just fine. However, it does lead many people to not realize that the tax system is prepaid and that they must pay taxes throughout the year even if an employer isn't withholding taxes. This usually applies in the case of the self-employed and those with significant investment income. Here's what you need to know about estimated taxes.
What Exactly Are Estimated Taxes?
Estimated taxes are simply installment payments of your regular taxes. If your withholding isn't enough to cover your tax bill, the estimated tax payments act in place of withholding. In short, while your final bill is totaled when you file your return, the IRS expects to be paid throughout the year.
When Is Payment of Estimated Taxes Required?
Estimated taxes must be paid if you expect to have a tax liability of $1,000 or greater at the end of the year. Between your estimated taxes and employer withholding, you must pay no less than the smaller of 100 percent of your previous year's tax liability or 90 percent of the current year's tax liability. Those who had no tax liability for the previous year are generally not required to pay estimated taxes.
What Happens If You Don't Pay Estimated Taxes?
Failing to pay estimated taxes either at all or insufficient amounts by the quarterly due dates results in owing interest for late payment of taxes. This interest penalty will automatically be calculated by the IRS, and you will be sent a bill. You can also calculate it yourself using IRS Form 2210. This is advantageous because interest continues to accrue until you pay in full. If your income varied throughout the year, you can also use this form to show when it was earned so that you aren't penalized for not paying estimated taxes early in the year on income that wasn't earned until later in the year.
When Are Estimated Taxes Due?
Estimated taxes are due quarterly, but the dates are not exactly every three months. First-quarter estimated taxes are due April 15, the second quarter is due June 15, and the third quarter is due September 15. Payment for the fourth quarter depends on when you intend to file. The regular due date is January 15, but if you plan to file your taxes and pay in full by February 15, you can skip the fourth-quarter estimated payment without penalty. Note that these dates may differ if you are a business that is not on the calendar year for tax purposes.
How Do You Pay Estimated Taxes?
When you complete your taxes, fill out Form 1040-ES to calculate how much you should pay in estimated taxes during the next year. The form has payment vouchers for each quarter that you can mail in with a check to the address listed for your state and tax return type on the Form 1040-ES instructions. The IRS also accepts online payments via ACH, credit card payments through third-party processors for a small fee, and automatic ACH payments via the Electronic Federal Tax Payment System.