If you are self-employed, it can be a good idea to make quarterly estimated tax payments.
Making regular tax payments can help you avoid paying interest penalties, and it can shield you from the hardships associated with a large tax bill once a year.
Others who should consider making quarterly estimated tax payments include investors and landlords whose tax withholding from a regular job may not be enough to cover the full amount of your tax bill.
You will need to make quarterly tax payments as follows: April 15, June 15, September 15, January 15.
Figuring your quarterly tax payments
When you make quarterly tax payments, you are estimating your tax liability. It is important to be as accurate as possible. While you are unlikely to exactly figure your taxes, you should try to come as close as possible. Here is how you can estimate how much to pay each quarter in taxes.
- Use your most recent tax return to figure your tax liability. The easiest way to do this is to subtract your total from line 63 (your withholding) on Form 1040 from line 62 (your total tax). This will give you an idea of how much you are usually short.
- Divide the result of your subtraction by four. This will provide you with the amount of money you need to pay every three months in order to meet your tax requirements.
- If you think that you will see a big difference in income (more or less) you can estimate your expected total income for the year, and divide that by four. Just realize that if you owe a great deal at tax time, you may be charged penalties and interest.
- For those that are self-employed, you will need to estimate regular income tax and self-employment tax. First, figure your average tax rate by dividing your income tax, found on line 43 of Form 1040, by your AGI (see line 37). Add your average tax rate to 15.3%, which is the self-employment tax rate. You should have a percentage as an answer. Multiply this percentage by your quarterly profit to decide how much to pay.
- An alternate method of figuring your liability for self-employment is to take your tax requirement from the year before, and divide it by four. This is much easier than figuring your required estimated tax payments each quarter. As long as you pay 100% of the tax shown on the most recent tax return, you should be largely protected from penalties and charges down the road.
Making quarterly estimated tax payments
Once you figure how much you owe in quarterly estimated taxes, it becomes important to actually make your payments. If you decide to mail in your payment, it needs to be postmarked by the appropriate due date. Your payment should be accompanied by Form 1040-ES. Write your Social Security Number or your Employer Identification Number in the memo line of your check, just in case. Your check should be made out to the United States Treasury.
Making quarterly payments easy
You can also use the Electronic Federal Tax Payment System (EFTPS) to make your quarterly estimated tax payments. You can go in every quarter and make your payment, or you can set up recurring payments that are automatically deducted from your checking account, or that are automatically charged to your credit card.
With EFTPS, you can also break down your estimated taxes into monthly payments, and set up automatic monthly payments as part of your budget. This system also allows you to print out reports.
Bottom line: If you want to avoid penalties, it is a good idea to make regular estimated tax payments if you have income beyond a regular job with an employer who withholds your income taxes. You can figure your requirement on your own, or with help from a financial or tax professional, and you can easily make regular payments to the Treasury.