The IRS expects to receive tax payments according to the income you are projected to earn in a given year. This is referred to as “pay as you go” system or estimated quarterly payments. These payments are estimated based on your total income from the previous year’s tax return. These quarterly payments help to ensure that you pay no unnecessary penalties at the end of the year for underpayment.
The estimated quarterly payment is a method to pay tax on the income which is not subjected to tax withholding. This can include the income from your business earnings, self-employment, interests, dividends, rent, and other sources.
If you are employed full or part-time, your taxes will be sent directly to the IRS as they are withheld from your paychecks. If you are self-employed or an independent contractor, you need to make tax payments in the form of estimated quarterly payments or estimated tax. Typically, the IRS requires the estimated tax to be paid quarterly, i.e. in 4 equal installments spread throughout the year. If you underpay your estimated quarterly payments, you will have to write a bigger check to the IRS when filing your tax return. If you overpay your estimated tax, you will receive the excess amount as a tax refund which is same as how withholding the tax works.
Here’s a look at who needs to make the estimated quarterly payments and how to make the quarterly payments:
Who Need to Make the Estimated Quarterly Payments?
There are many factors which determine whether you need to make the estimated quarterly payments. As a general rule is if your tax liability is $1,000 or above for the year then you are expected to make the estimated quarterly payments. If you owed more than $1,000 in taxes when you filed your tax return for the previous year then the IRS expects you will either have more tax withheld from your paychecks or that you will make the estimated tax payments the following year.
Generally, the following people are required to make the estimated tax payments:
- Self-Employed Persons or Sole Proprietor Business Owners
Those who have income from their own business will need to make the estimated quarterly payments if their tax liability is expected to be over $1,000 for the year. This includes both part-time and the full-time enterprises.
- Partners, Corporations and S Corporation Shareholders
Usually, the business ownership earnings will need estimated quarterly payments. In the case of corporations, the estimated quarterly payments must be made if the corporation is expected to have at least $500 in tax liability.
- People Who Owed Taxes for the Previous Year
If you owed taxes at the end of previous year, it probably means that too little was withheld from your paychecks or you had other income which increased your tax liability. This is a flag to the IRS that you should be making the estimated quarterly payments.
How to Make Estimated Quarterly Payments?
The IRS Form 1040-ES (Estimated Tax for Individuals) is used for calculating and making the estimated quarterly payments. To determine how much you are required to pay for the estimated quarterly tax, you must compile your income, credits, deductions and the paid taxes- similar to filing a yearly tax return. Typically, you can look at your income/liability numbers from the previous year to gauge what you’ll owe the next year.
To make your estimated quarterly payments, the year is divided into 4 payment periods in which each period has a specific payment deadline. Failing to make the estimated quarterly payments on time can result in the IRS penalties:
- 1st Quarter: January 1- March 31. Deadline: April 15.
- 2nd Quarter: April 1-May 31. Deadline: June 16.
- 3rd Quarter: June 1-August 31. Deadline: September 15.
- 4th Quarter: September 1- December 31. Deadline: January 15 of the following year.
Note that it is important to make the estimated quarterly payments. Even if you have already missed a few installments of the estimated tax, you should still try making the estimated payments as soon as possible.
Contact me to setup your payment schedule and figure out how much you owe quarterly. 615-326-TAX9