If you are a small business owner, freelancer or receive substantial income from investments, it may be necessary to pay Federal and state quarterly estimated tax payments. Calculating your quarterly tax payments isn’t always easy, but it is critical that you pay them to avoid penalties and interest or an even larger fee at tax time.
To help make the process easier, I put together this guide to answer some of the common questions I get from clients each quarter. I hope you find this helpful, and as always, I am available to answer any questions to make the process easier.
Who should send estimated tax payments?
Freelancers / Independent contractors / Self employed
Have untaxed income such as interest, dividends, and capital gains
Usually owe taxes when you file
If you are self-employed, receive income with no taxes withheld, or typically owe additional taxes when you file, then we recommend that you send off estimated tax payments, as required by the United States Internal Revenue Service (IRS).
Why should you send estimated tax payments?
Avoid costly penalties and interest on unpaid liabilities
Spread out your tax payments
Avoid unwelcome surprises when you file
Sending off estimated payments is good planning and helps spread your tax payments out over time. If you do not pay enough taxes throughout the year, then you may owe interest on the unpaid amounts and face late payment penalties. Depending on the amount you owe, these can be significant, and an unwelcome surprise. Sending off estimated payments avoids these surprises.
How much should you send?
- Use calculations based on your prior year’s taxes
- Calculate your liability based on real income for the year
- Use the workbook found here
- Find your state here
- Ask for help from a tax advisor here
Often your quarterly estimated payments for the year can be estimated from your previous years taxes. If you owed an additional $4,000 when you filed for 2018, then you could send four estimated payments of $1,000 each for 2019. Unless you have any major changes to income, large bonus, or capital gain, then this method is simple and reliable.
What if your income is different from last year?
If you are self employed and your income fluctuates, then you should review your income every few months. Looking at your profit and loss helps you to know your numbers and make better business decisions over time. Take your total income, or sales, for the year and subtract your total expenses to get your gross income. You can do this in a spreadsheet, or an accounting program like QuickBooks.
If you have investment income, you may also need to send off estimated payments. This would include interest earned, dividends received or reinvested, and capital gains from the sale of securities like stocks and mutual funds, or the sale of real property like land or a home. Check your monthly investment statements, or access your account online and run a report, to see your year-to-date earnings and losses.
This tax calculation can be a little trickier and is based on many items which are specific to each taxpayer. These include, filing status, number of dependents, other wages, investment income, home ownership, and charitable donations, just to name a few.
You can calculate your estimated taxes by using the IRS workbook found here, or by working with a tax professional.
When should you send estimate payments?
Postmark your payment, or submit online by:
Tax Year 2020
- September 15, 2020
- April 15, 2021
Tax Year 2021
- April 15, 2021
- June 15, 2021
- September 15, 2021
- April 15, 2022
How do you make a payment?
- Set up auto-pay to draft your tax payments on the due date
- Mail your printed vouchers from your prior year return
- Pay the IRS here
- Find your state here
When you file your taxes, you can authorize your estimated payments to auto-pay on the due date. This is good if your income and tax liability are similar year over year.
If you do not choose to auto-pay your estimates, you can make your estimated payments online at, https://www.irs.gov/payments.
Or you can mail a check. Just use the instructions in the IRS workbook found here, and mail your payment with the included vouchers. Find your state information here, If you use a software, or work with a tax professional, these payment vouchers can be printed with your personal information and payment amounts. Always be sure to include your social security number and tax year on all checks you send to the IRS and your state.
