How to Make Estimated Tax Payments

Jason Fernando is a professional investor and writer who enjoys tackling and communicating complex business and financial problems.

Ebony Howard is a certified public accountant and a QuickBooks ProAdvisor tax expert. She has been in the accounting, audit, and tax profession for more than 13 years, working with individuals and a variety of companies in the health care, banking, and accounting industries.

Recordkeeping, Business Structures, and Business Taxes

1. Understanding Small Business Taxes: A Comprehensive Guide
2. Tax Implications of Different Business Structures
3. Accounting for Small Businesses: A Comprehensive Guide to Financial Management
4. Tax Benefits of Being an LLC
5. Self-Employment Tax: Definition, How It Works, and How to File
6. Self-Employed Contributions Act (SECA) Tax: Overview and FAQs
7. Is Now the Time to Restructure Your Business?

Writeoffs, Tax Breaks, and Tax Reduction Strategies

1. Writing off the Expenses of Starting Your Own Business
2. 5 Tax Breaks Overlooked by Small Business Owners
3. 5 Ways for Small Business Owners to Reduce Their Taxable Income
4. Top 10 Home Business Tax Tips
5. Write-Offs and Write-Downs: The Main Differences

Tax Compliance and Reporting

Tax Credits and Deductions

1. 16 Tax Deductions and Benefits for the Self-Employed
2. The Small Business Health Care Tax Credit
3. Business Tax Credits: Meaning, How They Work, Example
4. 7 Insurance-Based Tax Deductions You May Be Missing
5. Indian Employment Credit (IEC): What It is, How It Works

Self-employed people often face the challenge of accurately tracking and remitting their taxes throughout the year. While self-employment offers a number of benefits, such as flexible schedules, and the ability to create jobs, it also presents unique challenges. Mastering the process of making estimated tax payments is important to managing these challenges and maintaining good standing with your tax obligations.

Learning how to make estimated tax payments can make one of those challenges much more manageable and help you stay on top of your taxes.

Key Takaways

• An important skill for self-employed people is knowing how to estimate and remit your taxes throughout the year.
• The Internal Revenue Service (IRS) requires estimated taxes to be paid quarterly, but you have the flexibility to make these payments more frequently—weekly, bi-weekly, or monthly—as long as the total amount due is paid by the end of each quarter.
• Failure to meet these requirements and deadlines can result in penalties and interest charges. Also, the requirement to make estimated payments can also apply to individuals who are not self-employed.

Why You Should Make Estimated Tax Payments

While tax returns are filed annually, taxes on income must be paid throughout the year. Employees typically meet this requirement through tax withholdings by their employers. However, self-employed individuals, and others who earn income not subject to withholding such as interest, dividends, and taxable alimony, must make estimated tax payments if they expect to owe at least $1,000 in taxes for the year.

Neglecting to make your required estimated tax payments can lead to a big tax bill when filing your tax return, potentially causing financial hardship or even bankruptcy. You can avoid any penalties if your withholdings and payments equal at least 90% of this year's total tax or 100% of last year's tax (110% if your adjusted gross income exceeds $75,000 for singles or $150,000 for joint filers).

To prevent negative outcomes, the government requires that individuals with non-withheld income estimate and pay their taxes periodically throughout the year. The IRS provides resources and guidelines to assist in calculating and submitting these payments.

If you delay your first estimated tax payment beyond the typical April 15 deadline, you should make payments as soon as possible to minimize penalties.

How to Make Estimated Tax Payments

To make estimated tax payments, you must first determine your anticipated tax liability, using your prior year's income as a reference point and adjusting based on current earnings and any relevant credits or deductions that might apply. After all, your income could rise or fall during the remainder of the year.

For example, if a gig worker typically works four hours a day doing deliveries, can estimate their tax based on that workload, adjusting their future payments if their hours change. If they decide later to work less hours, they would then update their estimate the next time they file.

The schedule of when you file your estimated tax payments is set out by the Internal Revenue Service (IRS).

While estimated tax payments are termed "quarterly," the periods they cover are not equal. For example, the period for the payment due on June 17 spans only two months, while the one due on April 15 covers three months. It's crucial to refer to the IRS-specified payment dates rather than relying on a general calendar. Also note that if a payment date falls on a weekend or holiday, the deadline shifts to the next business day.

The procedure for actually calculating your taxes is described in Form 1040-ES, Estimated Tax for Individuals. As the name implies, this form is designed specifically for self-employed individuals, offering a guide to estimate taxes accurately. It includes important details such as payment deadlines, access to government support hotlines, and information on special exemptions. Also, there is an included worksheet that allows for a detailed calculation of taxes, considering any relevant income tax deductions or credits.

Calculating your taxes is usually straightforward if you maintain accurate records of your income and expenses, potentially with the help of accounting software. On the other hand, if your records are disorganized, you might need to hire an accountant or bookkeeper to ensure your income is calculated correctly. If you require professional help, plan ahead to avoid missing any filing deadlines.

Once you have determined your income and estimated your tax liability, there are many ways for you to pay. The IRS provides several payment methods, which are printed on Form 1040-ES. These methods include online payments through your IRS Online Account, by check, over the phone, via credit card, and through online banking portals. There is even a mobile application called IRS2Go with its own payment options.

What Happens If You Can’t Afford to Pay the Estimated Amount?

It's a good idea to pay as much as you can towards your estimated taxes throughout the year to prevent facing a large lump-sum tax bill. If you struggle to make payments, the IRS offers options like payment plans, extensions, or potentially even tax forgiveness.

While approval isn't guaranteed, consistently making payments can improve your chances of favorable consideration from the IRS.

You may have to pay a penalty if you don’t pay enough tax through withholding and estimated tax payments. Additionally, late estimated tax payments can result in penalties, even if you ultimately receive a refund when you file your tax return.

Special Considerations

In addition to managing estimated tax payments, self-employed individuals should also plan for other financial commitments. Although individual circumstances will vary, it may be wise to allocate a portion of your income each month to retirement savings, life insurance, or longer-term financial goals such as buying a house or paying for college. In doing so, there are many resources that can be helpful, ranging from free online educational resources to professional financial planners.

How Do I Calculate Estimated Taxes?

To calculate your estimated taxes, begin with your total tax liability from the previous year as a baseline. Adjust this amount based on changes in your income and any new tax credits you qualify for. Other factors, such as whether you qualify for new tax credits, also would need to be considered. The IRS Form 1040-ES includes a comprehensive worksheet to guide you through this process. You can also use tax preparation software or seek professional help to ensure accuracy in your calculations.

What Happens if My Income Changes During the Year?

If your income changes during the year and you realize that your previous estimates may have been inaccurate, you can simply adjust your estimate in the next quarter to compensate for any underpayment or overpayment. For example, if you underestimated in the first quarter, you can increase your payment in the second quarter to cover the shortfall. Since estimated taxes often differ from your actual tax liability, making such adjustments throughout the year is a common and expected practice.

Are Estimated Tax Payments Only Relevant if You're Self-Employed?

No, you may still need to make estimated tax payments even if you are not self-employed. This can occur in cases where you receive a relatively large portion of your total income from sources that are not subject to withholding taxes, such as dividends or interest income. Form 1040-ES provides full and up-to-date guidelines that you can use to determine whether or not you are required to pay estimated taxes.

The Bottom Line

Being self-employed offers both personal and financial rewards, despite the initial learning curve involved. By following structured guidelines and using helpful resources like IRS Form 1040-ES, self-employed workers can accurately estimate and pay their taxes, ensuring they meet tax requirements. Seeking advice from a tax advisor when necessary can ensure that you keep your finances healthy and stay compliant with tax laws.