Not everyone pays their federal taxes through deductions from paychecks. You might be self-employed or get a lot of your income from interest, dividends, capital gains or alimony. It doesn’t matter to the Internal Revenue Service. IRS rules say you have to send in most of your taxes in payments throughout the year.
When to Estimate
You don’t need to file an estimated tax return and make payments if you expect to owe Uncle Sam less than $1,000 after subtracting any payroll taxes withheld by an employer. Even if you think you’ll owe more than $1,000, you still don’t need to pay estimated tax if payroll taxes will cover 90 percent of what you owe. You are also off the hook for estimated taxes if you expect this year’s payroll tax withholding to total more than 100 percent of last year’s total tax liability. For someone who is married and filing a separate return, the cutoff is 110 percent of what was owed last year.
Your Best Guess
Pull out last year’s tax return and use it as a guide to estimate how much federal tax you will owe this year. Adjust the gross income from last year for changes like raises or changing jobs. Subtract deductions and credits to arrive at taxable income. Next, use the current year’s tax rates to estimate your tax liability and then subtract payroll taxes withheld, if any. Estimated tax returns are also used to report Social Security and Medicare taxes due on self-employment income. Include these amounts when you make your estimate if you have income from self-employment.
How to Pay
You have to prepare an estimated tax return and pay taxes four times a year. This allows you to adjust the estimate as you go along. Make the estimates as accurate as you can to avoid underpayment penalties. Turbo Tax suggests comparing the estimate to your taxes from last year. As long as you are on track to pay 100 percent of the amount you paid last year, you are safe from penalties. For each filing period, complete Form 1040-ES. You can pay using a personal check, credit card or money order. However, the IRS recommends using the Electronic Federal Tax Payment System to send in what you owe by electronic funds transfer from a bank account. EFTPS is available on the IRS website.
Pay on Time
Estimated tax returns and payments are always due on the 15th day of a month. If the 15th falls on a weekend or holiday, the due date moves forward to the next business day. The due dates don’t correspond exactly to calendar quarters. Estimated tax is due in April for the months of January through March. For April and May, the due date is in June. The due date for the summer months of June to August is in September. Estimated tax for the last four months of the year is due in January of the following year.
Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.