Estimated Tax Payments

One popular question we hear from our small business clients is if they need to pay estimated taxes. That is followed up with “How much do I need to pay.”

However, small business owners and self-employed individuals aren’t the only ones who need to think about estimated taxes. Tax will be due on all income unless it is specified as non-taxable. Therefore, anything from interest, dividends, capital gains, W-2 income, contract labor income, gambling income, prizes, and alimony are all taxable.

There are two ways to pay the IRS for “estimated taxes.” These are through withholding, and by direct payment in the form of estimated tax payments.  By filling out a W-4 with an employer, the payroll department figures the amount of withholding tax. Withholding can also be elected some of the other sources of income in order to pay the IRS their share as you collect the income.

However, if you believe you will owe more tax, or if you elect not to have enough, or any, withholding taken from your payments, you may need to look at sending the IRS estimated tax payments.

How do I know if I need to make estimated payments?

First of all, if you meet all three of the following criteria, you are EXEMPT from having to make estimated payments.

• You had no tax liability for the prior year

• You were a US citizen or resident for the whole year

• Your prior tax year covered a 12-month period

If you do not meet all of these criteria, then you are required to make some sort of estimated payment.

How much do I need to pay?

For individuals, the IRS has form 1040-ES that you can use to figure your estimated tax.  We find with most of our clients that we can use their prior year’s tax return as a good starting point and adjust for changes we know are happening this year.

Most taxpayers can avoid the penalty for underpayment of tax if they owe less than $1,000 on your tax return, or pay at least 90% of the current year’s tax in estimates/withholding, or pay 100% of the tax shown on the return for the prior year—whichever is smaller.  There are special rules for fishermen, farmers, and high-income taxpayers. There are also some ways to avoid the penalty if you have uneven income throughout the year.

When do I pay?

Estimates are split into 4 equal installments due by the following dates (early payments are welcome)

• 1st quarter – Due April 15th

• 2nd quarter – Due June 15th

• 3rd quarter – Due Sept 15th

• 4th quarter – Due Jan 15th of the following year

Estimates can be made on the IRS EFTPS system, IRS Direct Pay, over the phone, or by mail.