If you don’t have your taxes taken out of a paycheck, guess what – you have to pay estimated taxes to the IRS and your home state every quarter of the year. And even if you have taxes taken out of your paycheck, but you don’t have enough taken out to cover your paycheck or any extra income from self-employment work, interest, dividends, alimony, etc., well, you also need to pay estimated taxes. If you don’t make the quarterly estimated payments or pay enough taxes through regular withholdings, you also may be charged a monetary penalty – even if you don’t owe anything when you file your return for the year. Hooray for the tax code! I have been paying estimated taxes for the past 5 years, as I have been mostly self-employed, and it’s not as bad as it seems to be – you just have to make sure you set aside enough money to make those quarterly payments. That to me was the most difficult thing to get used to; it takes discipline to take out a percentage of each and every dollar that comes your way and sock it away for quarterly estimated payments. I set up a separate account inside my ING Direct account labeled “Taxes”, and it eventually became habit that I no longer really think of.
How Much In Estimated Taxes Should I Pay?
Don’t know how much in estimated taxes you are supposed to pay each year? The easiest way to make sure you are on the side of the law is to pay at least 90% of what you owe for the current year or to pay 100% of what you owed for last year. Sounds confusing, I know. In reality, though, you just need to make sure you cover 90% of what you may owe this year, spread out over 4 quarters. I add up each three months of whatever I made and multiply it by my tax rate from last year, and voila – how much I owe for that quarter. Pretty simple, yes?
Do I Ever Not Have To Pay Estimated Taxes?
Sure – if you have enough taken out of your paycheck and/or you meet all three of the following conditions as laid out by the IRS:
– You have no tax liability for the previous year
– You were a US citizen or resident for the whole year
– Your previous tax year covered a 12 month period
Remember, you must meet all three of those items on the list in order to not have to pay estimated taxes. There are a few ways you can pay your estimated taxes, either by mail or over the internet.
Pay By Mail
You would need to use form 1040-ES, Estimated Tax for Individuals (PDF Downloads), to figure out and pay your Federal taxes. For your home state, you would need to visit the Department of Taxation website for the correct forms and mailing addresses.
Pay Over The Internet
To pay Federal taxes online, visit EFTPS, the Electronic Federal Tax Payment System. Using your social security number and a credit card, you can use EFTPS to make all your federal tax payments, including income, employment, estimated and excise taxes. Some states also offer online payments, so be sure to check the taxation website of your home state if you want to pay online.
The due dates for estimated payments are as follows:
January 15 – Fourth quarter previous year estimated tax payment due
April 15 – First quarter estimated tax payment due
June 15 – Second quarter estimated tax payment due
September 15 – Third quarter estimated tax payment due
If you still need a little more information, you can head over to the IRS website and check out Publication 505, Tax Withholding and Estimated Tax. Good luck, and don’t forget to pay on time!