Handling your own taxes is a must if you’re self-employed or is earning an in income from being an independent contractor. This means, as soon as you’re earning money as an independent contractor, you’re basically considered as a business-of-one. While employers withhold money from an employee's paycheck and send it to the IRS, you, on the other hand, will have to take out your own taxes from the income you earned.
Although paying estimated quarterly taxes four times a year may not be that exciting, it does offer a great advantage as far as softening your tax burden when tax season comes. You just have to do quarterly payments correctly in order to appropriately pay your estimated tax liability.
In this article, we will break down quarterly estimated taxes and carefully explain the process that you have to go through to complete it.
Who pays estimated taxes?
It’s important to first understand whether it’s necessary for you to pay estimated quarterly taxes or not. If you owe taxes of $1000 or more and you are planning to file as take the status of a sole proprietor, a partnership, S corporation shareholder, and/or a self-employed individual, then you need to pay estimated quarterly tax. Generally, if you’re expecting your business filing as a corporation to owe $500 or more in tax for the year, you will need to make estimated tax payments. If these minimum we mentioned are applicable to your business, then filing an estimated quarterly taxes is a must.
When should you not pay estimated taxes?
You don’t need to pay estimated taxes if you’re an employee. Employers are the ones who withheld quarterly taxes for you although most of the times they can get the amounts wrong. If this happens, make sure you fill out Form W-4 and submit it to your employer for them to appropriately deduct the correct amount in your paycheck.
You also don’t have to pay estimated taxes if you meet three specific conditions that are considered special by the IRS. First, if you do not owe any taxes in the previous tax year and did not have to file a tax return. Second, if you were a US Citizen or resident for the whole year. Lastly, if your tax year was 12 months long. For the rest of American taxpayers who didn’t meet any of the criteria we mentioned, then paying estimated quarterly taxes is a necessity.
When to pay estimated quarterly taxes?
Estimated quarterly tax payments, as the name implies, is due four times a year. These months are April, June, September, and January. Check out these estimated quarter tax deadlines to make sure you pay on time. It is best to set these dates in your calendar at the start of every tax year, as early as today.
How do you calculate estimated quarterly taxes?
This is the hardest part; calculating how much you actually owe each quarter.
To start, you have to first estimate your expected gross income, taxable income, deductions, and credits for the year. Doing this requires your income, deductions, and credits from last year to use as a guide. After you’re done finding out these estimated figures, you’ll then have to apply various calculations in order to figure you much your liability is in your estimated quarterly tax payments. Take a look at the IRS Estimated Tax Worksheet provided in Form 1040-ES for individuals or Form 1120-W for corporations if you need a more detailed guidance in doing your calculations.
How to pay your estimated quarterly taxes?
Submitting your payment to the IRS is the easier part once you’re done with the calculations. Fill out form 1040-ES and have it mailed to the nearest IRS office. There are also other options such as paying online or by phone via the IRS Payments Gateway. The Electronic Federal Tax Payment System is used by corporations in making their payments.
The IRS may impose penalties on quarterly tax payments that are paid late, for not paying enough estimated tax for the year, and for paying too much-estimated tax so make sure you do yours on time and accurately.
