Estimating tax payments is a scary subject to the average American taxpayer, but it doesn’t have to be. The qualifications, instructions, and deadlines are clearly explained and easy to understand. You may even be surprised that doing so probably won’t break the bank.
When you are an employee of a legal business, your employer withholds taxes from all your paychecks. Your employer sends the money to the government to pay your income taxes. People who work for themselves mowing lawns, selling cosmetics, or anything else, estimate their income taxes and pay them quarterly.
If your fear of estimated tax payments is keeping you from starting a brilliant side gig or small business, fear not: It’s doable. This guide provides you with information to understand what estimated taxes are, how to calculate them, and ways to pay them.
What Are Estimated Tax Payments?
Estimated tax payments are your educated guess at how much you will owe the IRS for earned income. Almost everyone who earns income is subject to income tax – federal income tax, state income tax, Social Security tax, etc.
The IRS says a person must pay their tax liability before the due date. This happens automatically if you work a typical job and your income from your employer is subject to federal withholding. You need to make your tax payments on your own when you work for yourself and withholding isn’t an option.
What You Should Know About Estimated Tax Payments if You’re Self-Employed
The uncertainty many taxpayers feel about this issue is understandable, so it’s wise to research the rules. Making the required payments is always better than skipping them and hoping it won’t be a problem.
Types of Income Subject to Tax
How to Calculate Estimated Taxes
Calculating and paying estimated taxes doesn’t have to be a dreaded event. Giving yourself enough information and time is essential to getting it done successfully. Taxpayers can use Form 1040-ES for this task. This IRS form offers background information and instructions to help individuals find out what to do based on factors such as employment and income. The actual calculation process is a bit math-heavy and relies on many specifics.
There are some simple but essential tips to keep in mind when it comes time to calculate estimated taxes. Make sure to note if you’re applying your previous year’s tax refund to the current year’s taxes. Another reminder is to be sure to check the income claimed and education taken on the prior year’s tax return; see whether it will be comparable in the next year.
Paying Estimated Taxes
The best way to pay estimated taxes is in four equal payments over a year. If your business is seasonal, though, it’s no big deal – the IRS is aware that lots of jobs don’t pull in an income regularly. Here’s a standard rule of thumb to abide by: Pay your estimated taxes as you get your income. This looks different for different people.
You may want to explore an annualized income installment option that allows individuals to send in estimated taxes once a year if your work is seasonal. You can find more information about this method in IRS Publication 505 and Form 2210.
The IRS accepts estimated tax payments in several ways. These include:
Common Mistakes When Calculating Estimated Taxes
Frequently Asked Questions about Estimated Taxes
Any tax issue is bound to leave taxpayers unsure of the rules. Here are the questions we hear most about estimated tax payments.
Silver Tax Group Can Help Calculate Estimated Taxes
Silver Tax Group is here if you need expert help with estimated taxes or any other tax consulting issue. We are highly skilled at getting our clients the best resolution to their tax issues and keeping the IRS from pushing them around.
At Silver Tax Group, our team of tax attorneys works diligently to help clients avoid costly penalties and IRS audits. Contract workers and anyone else unsure about estimated tax payments should reach out to The Silver Tax Group to speak to a professional.