The middle of July is a good time to talk about paying your quarterly estimated taxes because the need to file is not imminent. Estimated taxes are required for many people who own small businesses or are self-employed, including those working as independent contractors for an established company. They also may be required for people who receive income from interest, dividends, capital gains, prizes and awards.
Estimated taxes are due on the 15th of April, June, September and January. You generally must pay 90% of your total estimated tax liability, or 100% of last year's tax liability (whichever is smaller) in order to avoid a penalty. This may include not only income taxes but also the self-employment tax and the alternative minimum tax, if applicable.
According to the IRS, you must pay estimated taxes if both of these two situations apply to you:
- You expect to owe at least $1,000 in taxes this year, excluding any withholdings or refundable credits
- You expect your withholdings and refundable credits to be less than the smaller of:
- 90% of the taxes to be paid this year
- 100% (or 110% for certain high-income taxpayers) of last year's taxes
Use IRS Form 1040-ES to figure and file your estimated tax. (Corporations generally use Form 1120-W.) You will need to determine:
- Your expected adjusted gross income
- Your taxable income
- Any deductions or credits
- Your total taxes due
Tip No. 1: If you have missed a quarter, file and pay ASAP
There are penalties and interest associated with failing to make your quarterly estimated tax payments. These penalties can be significant and will only grow larger the longer you wait to file. It's generally less expensive to pay the penalty as soon as possible. That said, the penalty may be waived if:
- Your failure to pay was due to a disaster, casualty or other unusual situation that would make it inequitable to impose the penalty, or
- You reached age 62 and retired, or you became disabled during the tax year and your underpayment was due to a reasonable cause, not willful neglect
Tip No. 2: Consider hiring a professional to do your taxes
Coming up with a good estimate of your income can be a challenge. The process of figuring estimated taxes is essentially like doing your tax return ahead of time, then refiguring it each quarter.
A professional may be able to find tax savings that you wouldn't find on your own. At the very least, they could help you avoid mistakes and the costs associated with late or partial payments. Depending on your circumstances, professional help could end up paying for itself.