Making the leap from employee to self-employed is exhilarating. You’re master of your time, you can deliver 100% quality, and you control your money. Everything goes great until…tax time. Why? Because taxes are often overlooked until its time to file. Fear not, I’ve written this to help you stay on the right side of Uncle Sam from the get-go by answering four simple questions: 1. What are Estimated Tax Payments? 2. How do you calculate Estimated Tax Payments? 3. When Are Estimated Tax Payments Due? 4. How do you make Estimated Tax Payments?
1. What are Estimated Tax Payments?
In America we have a ‘Pay as You Go’ system for taxes. This means that the IRS expects tax payments on income as its earned, not just when the returns are filed. When you’re an employee that’s easy to do. You simply fill out a W4 and your employer calculates the withholdings then sends the payments to the taxing authorities for you. However, when you’re self-employed you are responsible for calculating and making these payments yourself. That brings us to the next question:
2. How do you calculate Estimated Tax Payments?
Here is the easiest way to calculate those payments: If you want to make quarterly payments go to line 63 and divide that number by 4 (because there is 4 quarters in a year). If you want to make monthly payments take that number and divide by 12 (because there are 12 months in a year). That brings us to the next question:
3. When are Estimated Tax Payments Due?
If you’re making quarterly payments use the following chart:
|1st: Jan 1 – March 31||April 15|
|2nd: April 1 – May 31||June 15|
|3rd: June 1 – Aug 31||Sept 15|
|4th: Sept 1 – Dec 31||Jan 15*of the following year.|
If you’re making monthly payments, simply pick a date (for example the 1st or the 15th) and make the payments on the same date every month. This brings us to the last and most important question:
4. How do you make Estimated Tax Payments?
There are two ways to make your Estimated Tax Payments. The first is by going to https://www.eftps.gov/eftps/ and making a payment. Even though this services is FREE you will need to create a profile. I strongly recommend making your payments online. Why? Because you can make the payment in seconds and get immediate proof of payment. With the IRS everything is about proof.
The second option is to mail in your payment. You’ll need to complete form 1040-ES (Click Here to download the form directly from the IRS) and send it to the address that corresponds to the State you’re in (see form for instructions). I don’t recommend this option. Why? Because your payment can become lost or undeliverable. This puts you at a high risk of getting a penalty for underpayment of estimated tax.
As always, this information is not legal advice, and you should consult a tax professional to determine what is right for your business. If you’d like our professional advice please schedule an appointment. As Enrolled Agents we can represent individuals and businesses in all 50 states, and we’d be happy to work with you directly.