If you are self-employed, a freelancer, or earn other income that is not subject to withholdings, paying state and federal estimated taxes is a necessary evil. With estimated taxes due tomorrow, it’s a good time to talk about due dates, who has to pay, and how to calculate your estimated quarterly taxes.
Table of Contents:
Do I need to pay estimated taxes?
According to the IRS, you must pay estimated taxes if you expect to owe tax of $1,000 or more and you file as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual. If you file as a corporation, you generally must pay estimated taxes if you expect the corporation to owe at least $500.
But even if you are an employee, you must pay estimated taxes if you have significant income not subject to withholding taxes. For example, an investor who sold an investment and made $10,000 in the stock market in the first quarter may need to pay estimated taxes on the realized gains.
The IRS offers the following flowchart to explain whether you must pay estimated taxes:
If the flowchart makes you long for a root canal, consider these general guidelines also offered by the IRS:
In most cases, you must pay estimated tax for 2012 if both of the following apply.
- You expect to owe at least $1,000 in tax for 2012, after subtracting your withholding and refundable credits.
- You expect your withholding and refundable credits to be less than the smaller of:
- 90% of the tax to be shown on your 2012 tax return, or
- 100% of the tax shown on your 2011 tax return. Your 2011 tax return must cover all 12 months.
The above percentages may be different if you are a farmer, fisherman, or higher income taxpayer.
When to pay estimated taxes
You must pay estimated taxes every quarter on a specific date. The official due dates are January 15, April 15, June 15 and September 15. If one of these dates follow on a weekend or federal holiday, however, the date slips to the next day that is not a weekend or federal holiday. Here are the actual due dates for 2012 and 2013:
|Quarter||2012 Due Dates||2013 Due Dates||For Income Received|
|Q1||April 17, 2012||April 15, 2013||Jan. 1 through March 31|
|Q2||June 15, 2012||June 17, 2013||April 1 through May 31|
|Q3||September 17, 2012||September 16, 2013||June 1 through Aug. 31|
|Q4||January 15, 2013||January 15, 2014||Sept. 1 through Dec. 31|
Note that the due dates for state estimated taxes varies from state to state. While most follow the federal schedule, some deviate. In Virginia, for example, the first estimated tax payment for a given tax year falls on May 1, not April 15. The due dates for the other quarters in Virginia follow the federal calendar.
How to pay estimated taxes
I pay my estimated taxes the old fashioned way—through the mail. Use Form 1040-ES, Estimated Tax for Individuals (PDF) to calculate the amount you owe, and include the form in your payment to the IRS.
As an alternative, you can pay your estimated taxes online via the Electronic Federal Tax Payment System (EFTPS). The website provides detailed instructions for registering and paying your estimated taxes online.
How to calculate estimated taxes
As with paying my estimated taxes, I calculate them the old-fashioned way, too. I let my tax accountant do it. There are, however, some good resources and tools to help those in the do-it-yourself crowd.
There are several ways to calculate your estimated taxes:
FORM 1040 –ES: The IRS tax form you use to pay your estimated taxes also includes a worksheet you can use to calculate how much you owe.
Look at Last Year: If your income and deductions haven’t changed significantly, you can simply look at what you owed last year. You’ll want to make sure there haven’t been significant changes in the tax code that will affect your tax liability. A good place to start is with the federal tax brackets, which have changed for 2013.
Quarter by Quarter: Particularly if you income or expenses fluctuate significantly during the year, it may prove difficult to estimate taxes on yearly basis. If that’s the case, estimate your taxes quarter by quarter. That may mean that your estimated tax payments will change each quarter, but that’s just fine.
Use Tax Software: The best tax preparation software will walk you through the steps of calculating your estimated tax payments. I’ve used TurboTax for this purposes in the past, and it’s a very easy to use.
Whatever approach you take, just don’t forget to pay your estimated quarterly taxes on time.
Preparing to Pay Your Estimated Taxes
Estimated taxes are a lot like an insurance bill, they can sneak up on you and ruin your monthly budget. I learned quickly as a small business owner that I had to set aside money each month for quarterly taxes. Get into the habit from the beginning, and your tax payments won’t wreck your budget. I save the money in a high interest savings account. When the taxes are due, it’s a quick transfer to my checking account and the taxes are paid.