Do I need to pay estimated taxes on my business income?
Estimating your taxes properly and remitting it to the IRS is a fundamental requirement if you are self-employed or earn income that is not subject to withholding. Failure to do so will result in penalties and interest. The general rule is that you should pay your taxes quarterly as they are owed.
How do I calculate my estimated tax payments?
To determine your estimated tax, you must figure your net income for the year and remit one quarter of the amount quarterly. If you expect to owe less than $1000 in taxes for the year, then estimated tax payments are not required. For corporations, this amount is $500.
How do I send the money to the IRS?
For self-employed individuals, you should use Form 1040-ES, Estimated Tax for Individuals to figure and pay your estimated tax, which then needs to be mailed to the IRS. If you have an EIN and elected to enroll in EFTPS (Electronic Federal Tax Payment System), you can simply submit your payments online.
So, the payments are due quarterly?
For estimated tax purposes, the year is divided into four payment periods with each having a specific payment due date. If a payment is mailed, the date of the postmark is considered the date of payment. The payment periods and due dates for 2015 estimated tax payments are as follows:
You must pay enough tax by the due date of each of the payment periods to avoid a penalty. Even if you are due a refund at the end of the year, you can still owe a penalty if you didn’t pay enough during a payment period.
Underpayment of Estimated Tax
If you do not pay enough tax throughout the year, you may have to pay a penalty for underpayment of estimated tax. There are safe harbors that you can use to avoid incurring penalties. If you pay 100% of last years tax or 90% of the current years tax, you will be safe. If your adjusted gross income is over $150,000, then you want to pay at least 110% of the prior year tax.
The information presented in the above article was based on an actual client interaction and is general in nature, and not warranted or guaranteed. Your situation is specific to you alone, so be sure to speak with a Certified Public Accountant or a trusted tax advisor to discuss your specific situation.
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To your success!
Noel B. Lorenzana
Disclaimer: Any accounting, business or tax advice contained in this article, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, I would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.
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