Understanding Estimated Taxes
When you work for yourself you generally have your employer withhold federal and state (if applicable) income taxes from your wages. Then at the end of the year it becomes a calculation of if you had enough withheld (i.e. you get a refund) or have to make a balance due payment.
But what if you work for yourself (i.e. self employed) and no one is “withholding” anything from your check? Then this post will clue you in on how you make your payments and keep Uncle Sam happy.
What is estimated tax?
Estimated tax is how you pay your taxes when you have income that isn’t subject to withholding. Just think of it as what your employer does for you when you don’t have an employer ( so to speak).
Who has to pay it?
If you are filing as a sole proprietor (Schedule C), or receive income as a partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments. Fortunately, you only have to make payments if you expect to owe tax of $1,000 or more when you file your return.
If you own a corporation, be advised that you generally have to make estimated tax payments if you expect it to owe tax of $500 or more when you file its return.
When are payments due?
For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return.
For the period: Due date:
Jan. 11 – March 31 April 15
April 1 – May 31 June 15
June 1 – August 31 September 15
Sept. 1 – Dec. 31 January 15 of the following year
How do you pay it?
To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. The worksheet in Form 1040-ES will help you figure the amount. You can then make your payment(s) using the voucher contained within or electronically via the EFTPS system.
Each state will have a similar form or electronic platform for you to pay the corresponding state taxes. In our home and surrounding states you would use:
Illinois Form 1040 ES
Indiana Form ES-40
Wisconsin Form 1-ES
Missouri Form 1040ES
Iowa Form 1040ES
Kentucky Form 740ES
What happens if you don’t pay it?
If you didn’t pay enough tax throughout the year (either through withholding or estimated tax payments), you may have to pay a penalty for underpayment of estimated tax. You can avoid this penalty if you owe less than $1,000 in tax after subtracting withholdings and credits, or if you pay at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.
Need help estimating your tax liability?
Give us a call at 1-844-829-3788 or shoot us an email via the link below and we’ll be happy to assist you with your quarterly projections, filling out your forms or just coaching you through the process.