Although it can sometimes chafe, the reality is paying estimated federal income taxes is the cost of operating a small business or being a freelancer in America. For those who are unfamiliar with the ins and outs of estimated taxes, this piece will shed a little light on the situation.
What is an estimated tax?
If you’ve been an W-2 employee for most of your working career, it’s possible that you’ve never heard of estimated taxes. Typically, full and part-time employees have all the appropriate taxes withheld from their paychecks and filed with the Internal Revenue Service by their companies’ human resources department. Those workers are only required to file their individual income tax returns every April 15. Small business owners and contractors who expect to owe at least $1,000 in federal taxes per year have to make four payments quarterly payments based on what they estimate to be their federal tax liability.
Why do you have to make quarterly estimated tax payments?
Two reasons. The federal government likes to know exactly how much money it has coming in every quarter, and small business owners and contractors won’t have to come up with one large annual payment. The estimated tax payment schedule is as follows:
- Taxes on income earned from Jan. 1 to March 31 must be paid by April 15.
- Taxes on income earned from April 1 to May 31 must be paid by June 15.
- Taxes on income earned from June 1 to Aug. 31 must be paid by Sep. 15.
- Taxes on income earned from Sep. 1 to Dec. 31 must be paid by Jan. 15 of the following year.
How do you estimate your quarterly tax payments?
This is actually where things get a little bit easier. Programs created by companies like QuickBooks, H&R Block, and Tax ACT will allow you to determine your estimated quarterly taxes using handy online profit and loss calculators. Once you figure out how much you owe, you can make a payment to the IRS via the government’s Electronic Federal Tax Payment System. Once you complete registration, you can schedule advanced payments up to 120 days in the future. To avoid any underpayment penalties, you should make sure that your payments equal 90 percent of your federal tax due that year or 100 percent of the tax you paid the previous year. This Nolo.com blog post goes into detail regarding estimated federal taxes, but if you’re still a bit unclear on the particulars, you might wish to schedule a meeting with a certified public accountant. After all, it pays to be safe rather than sorry when the IRS is concerned.
This article was written by Mario McKellop for Small Business Pulse