Worried about getting hit with a massive tax bill every time you file? Wondering how you can make your tax liability a bit less of a burden every April? If tax time every year is one of stress, where you owe thousands of dollars, you may actually need to pay
estimated taxes throughout the year.
Who should Pay Estimated Taxes?
Estimated taxes must be paid by individuals, including sole proprietors, partners, and S corporation shareholders, if they expect to owe $1,000 or more when their return is filed. Corporations generally have to make estimated tax payments if they expect to owe $500 or more when their return is filed. (Estimated tax requirements are different for farmers, fishermen, and certain higher income taxpayers, so your mileage may vary. If you need help figuring out which one you are, we know a really good accountant.)
Some reasons you may have to make estimated tax payments include:
Self employment income
Not enough taxes withheld from your salary or pension
Working more than one job
Income from interest or dividends
Alimony payments
Capital Gains
Prizes and awards
Estimated taxes cover not only income taxes, but also self employment taxes, and the alternative minimum tax.
You do not have to pay estimated taxes this year if ALL THREE of the following are true:
You did not owe any taxes last year.
You were a US citizen or resident all year.
Your prior tax year covered a 12-month period.
How Do You Pay Them?
Estimated tax payments are due on the following schedule:
April 15: Pay taxes for January 1 to March 31
June 15: Pay taxes for April 1 to May 31
September 15: Pay taxes for June 1 to August 31
January 15 (of next year): Pay taxes for September 1 to December 31 (this year)
Example: on Jan 15, 2023 you will pay taxes for September 1 - December 31, 2022
Now Remember: If these due dates ever fall on a Saturday, Sunday, or legal holiday, the payments are due the next business day. It’s the IRS, not Ebenezer Scrooge.
It’s gotten much easier to pay estimated taxes these days. You can send the IRS estimated tax payments with Form 1040ES, pay online, pay by phone, or even from your mobile device. Yep- there’s an app for that. It’s called the IRS2Go app. More details and all of your options are available at IRS.gov/payments.
How Much Do I Pay Each Quarter?
So now you may be thinking, "How much do I owe?" Much like a yearly tax payment, that depends on each individual and business. Generally, you want to estimate how much your income and deductions are going to work out to be for the year, figure out your estimated tax liability from that information, and then you will pay 4 equal installments (like QVC for the IRS).
Basing your estimated payments on either 100% or 110% of your last year's tax liability is usually a good way to make estimated payments work for you. The IRS provides instructions with the 1040ES - Estimated Taxes for Individuals and the 1120W - Estimated Taxes for Corporations to help you calculate your estimate. Before sitting down with your chosen worksheet, you should collect the following information:
Your previous year's tax return. This will be super helpful for grounding your estimates in some real numbers, and making sure you don't forget any income.
Your bank records. These will remind you if you had any unexpected income, just in case you happened to forget that you won the lottery... or something less exciting. Once you have started making estimated payments, this will also be an important record of any estimated payments you have made so far.
If you are a tax client of Thrive Accounting, we create 4 vouchers with the amount of the previous year’s tax broken up into the estimated payments. They include the due date and everything the IRS needs to know to apply the payment to the correct account!
That… Doesn’t Seem Like It Will Work for Me?
Typically, most folks pay estimated tax payments in four equal installments. If your business (or life!) doesn’t earn money in equal installments, for example a busy season or you shut down for winter, what do you do? There are a couple strategies we can employ to make this easier for you. Sign up now for the newsletter to learn how you can make estimated payments easier and avoid the penalty.
We'll be taking a deeper dive into how to utilize them in our April newsletter. If you would like to join us for that, and other deep-dives related to our blog topics, sign up for the newsletter here.
