Quarterly Estimated Taxes

Paying tax estimates can be confusing for many business owners, here is a clear cut guide on when to pay tax estimates to the IRS or the state.

Tip #1 - How to know if you need to pay an estimate

Our tax system here in the US is what is referred to as a "Pay-as-you-go" system. Meaning that your taxes are actually due throughout the year. Your tax return is due on April 15th of each year but taxes are owed throughout the year. This is typically not a problem of your only source of income is working as an employee as taxes are taken out each paycheck. Business owners, landlords, traders, and others with income outside of employment likely should be paying estimates. Selling a home for a profit may require estimated tax payments as well.

Tip #2 - When are Estimates Due?

The IRS requires an estimate to be paid on time, they must be paid on the following dates.

Quarter 1 - Due April 15th.

Quarter 2 - Due June 15th.

Quarter 3 - Due September 15th

Quarter 4 - Due January 15th in the following year

Tip #3 - What happens if I don't pay my estimates?

Penalties and interest will apply to your taxes when you pay with your tax return. How much depends on federal interest rates in each quarter and the amount unpaid.

Tip #4 - How do I figure out how much to pay?

If you want to avoid penalties and interest the IRS actually has a simple way of calculating the estimates. The IRS allows you to pay "Safe Harbor" estimates, which are based off of your taxes last year. This is why it is important to get your taxes done by April 15th so we can help you with the first estimate as well. We can even schedule the estimated tax payments to be automatically withdrawn with our software.

The safe harbor is 100% of the previous years tax split into four equal payments if you made under $75,000 if you file single or married filing separate, and $150,000 if you are married. If you make over those stated amounts then the tax is 110% of the prior year.  

Your total tax is not what you owed or what your refund was on your previous tax return. Your total tax is box 24 on the second page of your federal tax return form 1040.

Example #1:

Cindy and Jake make $100,000 a year and file married filing joint. Last year their total tax was $10,000. Neither of them have regular jobs with withholdings. They will pay $10,000 as an estimate divided into quarters (by four). Each estimate will be $2,500.

Example #2:

Terry makes $80,000 a year and is unmarried. Last year his total tax was $9,000. Since he is unmarried and made more than $75,000 he needs to pay 110% of last years taxes split into four quarters. If we multiply last years tax by 1.1 (110%) we get $9,900. Divided by quarters this will be an estimate of $2,475 each quarter.

Tip #5 - Remember these key points

Estimates are due each quarter. Paying a little is better than nothing. There is a safe harbor here to help you. The Each state has estimates as well that can differ from the federal estimate. For example in California there are only three estimates, and Iowa's payments are due at the end of the month not on the 15th.

Conclusion

If you are still unsure you are always more than welcome to make an appointment with us to go over estimates. Please email us at support@foryoutax.com with details on your situation so we can get started with assisting you.