Lower Your 2021 Tax Bill by Avoiding Tax Penalties on Estimated Tax Payments
Have you heard about estimated tax payments, but you aren’t sure what they are or if you need to make them? Here is a quick guide we at Shoebox Tax Prep put together for you.
Estimated tax payments in a nutshell
Estimated tax payments are basically prepayments of your taxes, paid quarterly throughout the year. You should check whether you need to pay estimated taxes if you are self-employed, a small business owner or S-Corp shareholder, a freelancer, or if you receive substantial income from investments.
Rule of thumb on whether you need to make estimated tax payments
The rule of thumb is that if your annual individual income tax bill is over $1,000, you need to pay Federal and state quarterly estimated tax payments. If you don’t send in the payments, penalties and interest on the missed payments will get added to your tax bill.
How to estimate the tax you owe for 2021
You can calculate your estimated taxes by using the IRS workbook found here. Try using the worksheet in Form 1040-ES to determine your estimated tax. Items that will be a factor in determining your estimated taxes are:
- Last year’s income
- Federal Withholdings
Investment Income from interest earned, dividends received/reinvested, capital gains, and the sale of real property like land or a home
So, you do need to make estimated tax payments. Now what?
The quickest and easiest way to make an estimated tax payment is to do so electronically with IRS Direct Pay. Taxpayers can schedule a payment in advance for the January 31st deadline.
Make sure to keep a record of any estimated tax payments you have made.
When should you send your estimated tax payments? Postmark your payment, or submit online by:
- April 15
- June 15
- September 15
* If you underpaid on taxes in 2021, you have until January 18, 2022 to make an estimated payment for the fourth quarter of 20201.
How do you make a payment?
- Set up auto-pay to draft your tax payments on the due date
- If you do not choose to autopay, you may pay the IRS online here
- Mail a check with your printed vouchers from your prior year return using IRS workbook found here
- Find your state here
If you use a software program, 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.
Given the complexity and knowledge base required for accurately estimating one’s taxes, we recommend working with a tax professional. At Shoebox Tax Prep our experienced, licensed tax advisors work with sole proprietors and small business owners like you who save precious tax dollars and time by leaving the complex tax preparation work to us, while they take care of their business.