This guide on estimated taxes helps self-employed individuals and small business owners calculate, pay, and manage their tax obligations with ease. By following these steps, you can stay compliant and avoid penalties.
What Are Estimated Taxes?
Estimated taxes are quarterly payments made to the IRS on income not subject to withholding, such as earnings from self-employment, small businesses, rental properties, investments, and other sources.
If you expect to owe at least $1,000 in taxes after subtracting credits and withholding, you’re required to make estimated payments. This guide simplifies the process of calculating and paying your estimated taxes.
Who Needs to Pay Estimated Taxes?
You must make estimated tax payments if:
- You expect to owe at least $1,000 in tax for the current year after subtracting withholding and refundable credits.
- Your withholding and refundable credits will be less than:
- 90% of the tax shown on your current year’s tax return, or
- 100% of the tax shown on your prior year’s tax return (if it covered 12 months).
Special Rules:
- Farmers and Fishermen: If at least two-thirds of your income comes from farming or fishing, you may qualify for different requirements.
- Higher Income Taxpayers: If your adjusted gross income (AGI) exceeds $150,000 ($75,000 if married filing separately), you must pay 110% of last year’s tax liability to avoid penalties.
How to Calculate Estimated Taxes
Use IRS Form 1040-ES, Estimated Tax for Individuals to estimate your payments. Here’s how to calculate:
- Estimate Your Total Income: Include all taxable income for the year.
- Subtract Deductions: Account for deductions like the standard deduction or business expenses.
- Determine Taxable Income: Subtract deductions from gross income.
- Apply Tax Rates: Use IRS tax brackets to calculate your tax liability.
- Factor in Credits: Reduce your liability with eligible tax credits.
- Divide by Four: Split the remaining annual amount into quarterly payments.
For additional help, use the IRS Tax Withholding Estimator.
Payment Deadlines
Estimated taxes are due quarterly, on the following dates:
- April 15: For income earned January 1 – March 31
- June 15: For income earned April 1 – May 31
- September 15: For income earned June 1 – August 31
- January 15 (next year): For income earned September 1 – December 31
If a deadline falls on a weekend or holiday, payments are due the next business day.
How to Pay Estimated Taxes
You can pay your estimated taxes through any of the following methods:
- IRS Direct Pay for payments directly from your bank account.
- EFTPS (Electronic Federal Tax Payment System) for secure online payments.
- IRS-approved payment processors for credit or debit card payments.
Always keep records of your payments for tax filing purposes.
Consequences of Missing Payments
Missing estimated tax payments may lead to penalties, even if you qualify for a refund later. To avoid penalties:
- Check your estimated tax calculations regularly.
- Ensure timely quarterly payments.
Simplify Your Tax Process with Expert Help
Managing estimated taxes doesn’t have to be stressful. With proper planning and guidance, you can confidently meet your tax obligations.
At Torkelson & Associates CPAs, we specialize in helping self-employed individuals and small business owners navigate the complexities of estimated taxes and other financial matters. Whether you need help calculating payments, understanding deductions, or filing your taxes, our team is here to support you.
Contact us today to schedule a consultation and let us simplify your tax journey!