Estimated taxes can be challenging, especially for a taxpayer who needs to report self-employment income. The wrong numbers can lead to a tax liability or underpayment of estimated tax, which then results in an underpayment penalty. Read on for more information on making the right estimated payments.
Master Estimated Taxes with This Guide
In This Article:
- How Do I Know If I Need to Pay Estimated Taxes?
- Am I Allowed to Take Deductions?
- What Types of Forms Do I Need?
- Do I Have to Pay Self-Employment Taxes on a Certain Schedule?
- How Do I Go About My Calculations?
How Do I Know If I Need to Pay Estimated Taxes?
The first thing to know about estimated taxes is when to pay it. The IRS requires you to make estimated tax payments under the following circumstances:
When you will end up owing a minimum of $1,000 to the federal government in taxes once you have taken out any refundable credit and tax withholding.
When your refundable credits and tax withholding end up being less than either 90% of any taxes reflected on the current tax year’s federal return or 100% of the taxes on your previous year’s return.
Self-employed individuals and those earning money part-time without having taxes taken out typically fall into this group. You may also owe an estimated income tax if you have profited in any way from other transactions throughout the year. This can include money earned from:
- Cash prizes from contests or sweepstakes
- Capital gain payments
- Any alimony received
- Payments from interest dividends
Those who form LLCs or partnerships or who are a part of an S corporation need to estimate payments if they own $1,000 after taking out all other deductions and expenses. The minimum goes down to $500 for corporations.
If you receive wages from another employer, you can opt to have additional money under income tax withholding. You will need to file a W-4 form with your company outlining the amounts you want taken out.
Am I Allowed to Take Deductions?
When it comes to estimated taxes, you can deduct expenses related to the operation of your business. Make sure you keep the receipts of your transactions as proof to the IRS.
Some of the common business deductions include the following:
- Startup expenses
- Gifts bought for clients
- Items to set up a home office
- Charges for meals and entertaining business clients
- Vehicle expenses
- Any casualty losses
Money paid for things such as building space, land, or other items you will use for more than one year are capital assets. It means they depreciate each year, reducing what you can claim on your tax returns for them each year.
It is best to consult a tax attorney who can help you come up with a yearly deduction percentage value for these types of expenses.
What Types of Forms Do I Need?
Sole proprietors, single-person LLCs, and independent contractors can file their expenses on a Schedule-C form for their estimated taxes. Independent contractors can usually just use a Schedule C-EZ, which only requires a listing of any income you made through the year and a summary of paid expenses.
Do I Have to Pay Self-Employment Taxes on a Certain Schedule?
You should be making quarterly payments if you meet the conditions requiring you to pay estimated taxes. What you pay varies on what you earn during that period.
Here is a breakdown of the quarterly periods as defined by the IRS. Payment dates may differ from one tax year to the next, but they are usually due around the middle of the month following the end of the prior tax quarter:
- First Quarter: January 1 to March 31
- Second Quarter: April 1 to June 30
- Third Quarter: July 1 to September 30
- Fourth Quarter: October 1 to December 31
The IRS provides you with different methods of making your quarterly estimated tax payments:
- Crediting balances owed in a previous year toward the current year
- Mailing in payments for estimated taxes along with a 1040-ES payment voucher
- Calling in and making a payment over the phone
- Using electronic funds to make payments
Failing to pay quarterly estimated taxes on time could result in you owing additional penalties to the IRS. It is best to carve these payments out of income as you earn it to avoid using the money on other business expenses.
How Do I Go About My Calculations?
You can break estimated taxes down into quarterly payments by dividing the amount you paid last year by four. That is the minimum of what you should be paying to the IRS.
You can pay less if you are sure this year’s income will decrease from the prior year. You should then base your payments on what you have earned during the current tax year.
The easiest way for first-year business owners to meet their tax obligations is by paying at least 100% of the amount of taxes paid out the previous year. Increase that amount to 110% if you end up as a high-income earner through the year. It means you are reporting an adjusted gross income of at least $150,000 on the income tax return. It drops to $75,000 for married filing separately.
What is an adjusted gross income and how do you calculate it? Here’s a tutorial from Chegg:
Do not allow a promising business or side income opportunity be marred by failing to properly account for your estimated taxes. Invest in good tax software or hire a tax accountant to help keep you on track to avoid owing penalties to the IRS. Above all, make sure you get in all payments owed by the April deadline of the upcoming tax year. Tax Relief Center specialists can provide more guidance on how to go about it.
What else do you want to know about estimated taxes? Let us know by leaving a comment below!