Earning money from a second job or side business can be a nice boost to your household finances, but how do you go about trying to estimate tax payments on this extra income? You don’t want to get it wrong and end up being penalized by the government. Let this post serve as your guide.
In this article:
- Understanding Estimated Tax Payments
- How to Calculate and Estimate Tax Payments
- Changes to Estimated Tax Payments
Estimate Tax Payments and Avoid Penalties with This Handy Guide
Understanding Estimated Tax Payments
To estimate tax payments for full-time employed individuals is easy. The amount just comes from the paycheck. If you’re a freelancer working for different clients or the owner of your own business, you’ll need to do this by yourself. That includes if you’re a sole proprietor, a business partner, or a shareholder of an S-corps.
You’ll need to make estimated tax payments under the following circumstances:
- You made over $1,000 during a given calendar year after accounting for any deductions or credits.
- Your refundable credits and withholdings end up being less than (a) 90% of the taxes reflected on your tax return for the 2018 tax year or (b) 100% of taxes owed from 2017.
The extra income doesn’t have to be in the form of a paycheck. You may need to estimate tax payments for earnings from the stock market or interest from other investments. You may also be paying estimated taxes on capital gains.
You’re not liable for estimated tax payments if you meet the following:
- Your tax liability was $0 for the prior year.
- You were a U.S. citizen or legal resident the entire year.
- Your previous tax year covered all 12 months.
How to Calculate and Estimate Tax Payments
To estimate tax payments, you should account for the following:
- All adjusted gross income (AGI)
- Any additional taxable income other than through employment
- Taxes already paid
- Deductions you’ve taken
- Any credits provided to you
You have two choices in how you make your payments. You can make one payment when income taxes are due during the current year or make quarterly payments based on the schedule set out by the IRS:
Pay Period Date Payment Due
January 1 – March 31 April 17
April 1 – May 31 June 15
June 1 – August 31 September 17
September 1 – December 31 January 15 (next calendar year)
You have the option of filing your tax return by January 31, 2019, and paying your taxes in full instead of making a final quarterly installment in January. You’re subject to penalties if you miss or are late with any of your quarterly payments.
Changes to Estimated Tax Payments
In previous years, the taxpayers could pay the same amount they paid the year before. The tax law rolled out by Congress in 2018 changed all that. They can now claim double the standard deductions. Any benefit gained with this increase could be offset through the reduction or elimination of itemized deductions.
Other changes affecting how you estimate tax payments include:
- An increase in the child tax credit
- Elimination of personal exemptions on your tax return
- Adjustments in the calculation of taxes for small business and pass-through entities
The IRS provides the 1040-ES form to taxpayers for calculation and filing of these payments. It’s a good idea to hire an outside tax expert if you find it confusing and need help when it’s time to estimate tax payment each quarter. That reduces your chances of miscalculating or entirely missing out on making your required tax payments.
You may be able to get any assessed penalties waived if you:
- Couldn’t make your estimated tax payments because of a disaster, some other calamity, or other similar circumstances
- Ended up retiring after reaching 62 years old during the calendar year.
- Became disabled within the year you should have made the payments
- Made an oversight with a reasonable cause and wasn’t willful on your part
Learning how to estimate tax payments is essential. You’re ultimately responsible for meeting your tax obligations to the government. Be aware of any tax changes that can affect your dues and stay compliant. When in doubt, ask for professional help.
Which do you prefer: paying quarterly or one-time estimated tax payments? Let us know below.