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Estimated Tax Payments Due


June 15, 2009

If youíre self-employed, itís that time again; time to send the IRS an estimated tax payment. Didnít I just do that, you ask? Well, in a sense, yes, it does kind of feel that way, doesn't it? That is because the second quarterly estimated tax payment is due just two months after the first. Be forewarned, the third payment will follow in 3 months on September 15th and the fourth, can be as late as 4 months after the third, or January 15th 2010. Itís easy to forget about this monthís payment, because it is seems to be coming right on the heels of the April 15th payment and the filing of last yearís taxes.

To begin with, if you are frustrated with trying to keep your head above water, it is a good idea to remember why you are paying the Internal Revenue Service estimated taxes. The greatest motivator for making your payments in a timely manner is the threat that the IRS will charge you a penalty if you haven't paid 90% of what you owe for the tax year or an amount equal to 100% of your tax liability for the prior year. So, if you are self-employed, own a business or make substantial amounts of money through your investments, it is a good idea to take heed.

If you are newly self-employed, you may be wondering why you have to pay estimated taxes, to begin with? Well understand that the majority of people have little self-control and even less capability of setting aside money to pay tax debts. Given half a chance, they would spend it on other things. In addition, the government needs your money throughout the year for services, and if they didnít receive your estimated taxes theyíd be forced to borrow the necessary funds. This in turn would drive your taxes up, to cover the interest they'd have to pay. Keep in mind, we have a pay-as-you-go tax system, which if paid on schedule, will help to keep you floating and the IRS happy and out of your business as much as possible. If it helps, the best way to look at estimated tax payments is to see them as the equivalent to W-2 withholdings being deducted from your earnings every paycheck, if you had been working for someone else instead of yourself.

So how do you estimate what to pay? The best rule of thumb is to pay 100% of last yearís tax bill (110% if your gross income was over $150,000). Following these guidelines, you will not owe any penalties come April, even if it turns out that you do owe more than that amount. If you have been in business for several years and expect to earn more money this year because your business is growing, pay what your total tax was last year, broken into four equal, quarterly installments.

For example: If you paid $4,000 in taxes last year, in four quarterly payments of $1,000 as long as you send the IRS $1000 every quarter, you won't owe any penalties even if you owe $8000 in tax this year. Keep in mind, you will still need to come up with that extra 4,000 when April of next year, rolls around, so it's best not to run out and buy that wide-screen t.v. just yet. If you don't want to owe the additional $4,000 you would just increase each of the quarterly payments by $1,000 so your total estimates for the year equal $8,000. 

By the way, if you donít expect to owe more than $1,000 in taxes for the entire year, you do not need to make estimated tax payments. 

So, finally, how do you pay your estimated taxes? If you have had your taxes prepared by a tax professional, they should be able to make accurate recommendations for your quarterly payments with the information contained in last yearís return. They will also be able to print the necessary vouchers that you should attach to your payments, in order to keep the IRS content. 

If you prefer, you can download Form 1040-ES from the IRS website. The form includes a worksheet that walks you through figuring out how much estimated tax you should be paying. Youíll need to have your prior yearís tax info handy including adjusted gross income and deductions. 

To pay your estimated taxes online and avoid the payment vouchers you can sign up for the ďElectronic Federal Tax Payment SystemĒ (EFTPS), in order to pay your estimated taxes via direct debit.  Keep in mind that once you sign up, you will need to allow for 15 days, in order to receive your PIN information before you can actually make a payment. So either plan well in advance of a payment or fill out the estimated tax vouchers and mail them on or before the due dates of:

  • April 15
  • June 15
  • September 15
  • January 15 (next year)

Remember: The payments are NOT every 3 months, but are spaced unevenly. Donít let one of them catch you by surprise! 

For more information about making estimated tax payments see IRS Publication 505 or consult with your tax professional.