Quarterly Estimated Tax Payments

Who must make quarterly estimated tax payments, how they are made, tips on figuring them out. Below are selected excerpts from www.irs.gov on the subject, as well as an informative video.

What Are Estimated Tax?

Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.

Estimated tax is used to pay income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough through withholding or estimated tax payments, you may be charged a penalty. If you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return.

Who Must Pay Estimated Tax?

If you are filing as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return.

You do not have to pay estimated tax for the current year if you meet all three of the following conditions, although it could very well be in your best interest to pay them anyway:

You had no tax liability for the prior year
You were a U.S. citizen or resident for the whole year
Your prior tax year covered a 12 month period

How To Figure Estimated Tax

To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.

You will need to estimate the amount of income you expect to earn for the year. If you estimated your earnings too high, simply refigure your estimated tax for the next quarter. If you estimated your earnings too low, again recalculate your estimated tax for the next quarter. You want to estimate your income as accurately as you can to avoid penalties. Accurate profit and loss statements from your business can be quite helpful in projecting your net income from that source.

How To Pay Estimated Tax

If you are filing as a sole proprietor, partner, S corporation shareholder and/or a self-employed individual, you should use Form 1040-ES, Estimated Tax for Individuals (PDF), to figure and pay your estimated tax.

For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return

Using the EFTPS system is the easiest way to pay your federal taxes for individuals as well as businesses. Make ALL of your federal tax payments including federal tax deposits (FTDs), installment agreement and estimated tax payments using Electronic Federal Tax Payment System (EFTPS). If it is easier to pay your estimated taxes weekly, bi-weekly, monthly, etc. you can, as long as you have paid enough in by the end of the quarter. Using EFTPS, you can access a history of your payments, so you know how much and when you made your estimated tax payments.

For More Information:

Quarterly Estimated Tax Payments: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estimated-Taxes

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