Probably the questions I get the most revolve around the issue of estimated tax payments. For many self-employed taxpayers, the process of making estimated tax payments can be mysterious and confusing. But it doesn't have to be that way. In this blog post, we'll demystify estimated tax payments and provide you with a clear guide to help you navigate this essential aspect of tax planning.
Estimated tax payments are payments that individuals and businesses make to the Internal Revenue Service and, in some cases, state and local tax authorities. For people who are self-employed or who have a significant amount of rental or investment income, such as dividends and interest, estimated tax payments are how you pay taxes that you would normally pay through payroll withholding. Failing to make estimated tax payments can lead to an underpayment penalty and interest charges.
Generally, most taxpayers will avoid the underpayment penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. Usually, if you did not owe taxes in the prior year, you will not be charged an underpayment penalty in the current year. This is a big relief for people who are self-employed for the first time, but it is still encouraged to make the estimates in order to avoid a large tax bill at the end of the year.
The IRS expects taxpayers to make estimated tax payments throughout the year, typically in four equal installments. These payments are due: April 15th, June 15th, September 15th, and January 15th. If your income that is subject to the estimated tax payments is relatively stable, then the simplest method of estimating tax payments is to calculate them when you file your return. For example, if you owed $4,000 when you filed your 2022 return, then you will want to make 4 $1,000 estimated tax payments on each of the due dates. However, if your income fluctuates from year to year, you may need to calculate your income and deductions each quarter to establish how much you should pay in estimated taxes. Fortunately, the 1040-ES includes a worksheet you can use to help calculate this amount. You do not need to send in the worksheet with your payment, it only exists to assist you.
We also have a spreadsheet we can provide to help you track your income and expenses. Click here to download the Business Deductions Worksheet. You can also use this spreadsheet to provide us with your business income and expenses at the end of the year in order to prepare your tax return. If you are still having difficulty calculating your income and expenses, we do provide bookkeeping services to help make this process as simple as possible. Monthly bookkeeping can also streamline processing the business tax return at the end of the year.
The easiest way to make estimated tax payments is through the IRS Direct Pay system on their website (link here: https://www.irs.gov/payments/direct-pay). You can also mail a check or money order using the payment voucher provided with Form 1040-ES. You will need to fill out the 1040-ES payment voucher with your personal tax information and include your social security number and the form ID 1040-ES on the memo line of your check, otherwise you risk the IRS misapplying your payment. Finally, maintain records of your estimated tax payments, as you will need this information when filing your annual tax return.
You can always contact us to ensure you are making accurate payments.
Making estimated tax payments is an essential part of responsible tax planning. By understanding when and how to make these payments, you can avoid penalties and ensure that you're meeting your tax obligations throughout the year. Don't let the complexity of estimated tax payments intimidate you, there are many resources to help you navigate the process with ease. The IRS website has many articles that provide clarity on this matter and you can always consult a tax professional if you need more assistance.
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