Estimated Tax Payments
Tax payments can be confusing. Estimating what you owe can sound scary. The truth? Estimating tax payments is easy and it exists to keep your taxes on track.
One difference between being an employee of a company and being self-employed is how your income tax is paid. As an employee, taxes are ordinarily withheld from paychecks to pay your income taxes as you go (and you may even get a refund during tax time if you overpay). As someone who is self-employed, or receives income other than your employment wages, you may need to pay estimated taxes each quarter.
Interest, dividends, alimony, self-employment income, capital gains, prizes, and awards are all considered income outside of employment wages.
According to the IRS;
“Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.”
The rule is that you must pay your taxes as you go throughout the year through withholding or making estimated tax payments. If at filing time, you have not paid enough income taxes through withholding or quarterly estimated payments, you may have to pay a penalty for underpayment.
Figuring out your estimated tax payments sounds harder than it is. You should either use a tax service or work through Form 1040-ES or Form 1120-W (both available on the IRS website and depend on the type of entity you are.) You’ll need your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.
Estimated taxes are due four times throughout the year:
Q1 is due April 15th
Q2 is due June 15
Q3 is due September 15
Q4 is due January 15 of the following year
The Q1 deadline is quickly approaching- are you ready?