Since I’ve started blogging and collecting a small amount of income for doing it, I’ve had to start paying quarterly estimated taxes for the money that I’ve been making. It can be a complete pain to do this because not only are you cutting the government a nice sized check, but you have to do it 4 times a year. If you’re not used to doing that it can be extremely easy to forget! I almost forgot the 3rd quarter payment this year, and only did it last moment!
Who Needs To Make Estimated Tax Payments?
Our tax system is a pay as you go system. So if you’ve got a regular day job, the company you work for will usually withhold taxes from your paycheck in order to cover your tax liability. Normally you would want your tax withholding to be equal to your tax bill so that you don’t owe money, and you don’t get a refund at the end of the year.
If you have extra side jobs, investment income or if you are self employed, you will probably have to make estimated tax payments.
To avoid penalties at tax time you will need to make sure that you make your estimated tax payments, and at the very least meet one of the following safe harbor requirements. You can meet the requirements through increased tax withholding at your job, estimated tax payments, or a combination of both. Different rules may apply for some taxpayers.
Safe Harbor Requirements To Avoid Tax Penalties
- Owe less than $1,000 for this year’s taxes.
- Withhold 100% of last year’s tax liability. (We met this safe harbor requirement because it’s easiest to calculate)
- Withhold 90% of this year’s tax liability. (Do you know what it’s going to be? let the guessing game begin!)
What you’ll need to do is download government tax form 1040-ES, and fill it out completely to figure out what your estimated tax payments should be for the coming year. If your income is variable, it may be a bit of a guessing game – but then again, that is why they have the safe harbor requirements – so you can avoid penalties if you’re off. For our household we’re going the easy route and just making sure that we withhold 100% of our last year’s tax liability. We’re also saving up a bit of extra money for any extra tax we may owe at tax time.
When Should I Be Making Payments?
If you’re going to have to make estimated tax payments this year, there are 4 payments that you’ll need to make, one each quarter. They are:
- April 15
- June 15
- September 15
- January 15
Please be sure to make note that the estimated tax payments are NOT every 3 months, but are spaced unevenly. That can make it extremely confusing – so don’t let one of those payments sneak up on you!
You can either pay by mail (find where to send your payment here), or online by registering for the Electronic Federal Tax Payment System. If you plan on paying online, register in advance because it will take you a while to receive your PIN via mail.
Don’t Forget State Estimated Tax Payments
Remember, when you’re paying your estimated taxes for self-employment income, you’re not just paying for federal taxes. You’re paying all of this:
- Federal estimated taxes
- State estimated taxes (if your state has income tax)
- Self-employment tax of 15.3% (the social security and medicare portion of your tax).
Even if you meet your safe harbor requirement, if you’re not careful you can grossly underestimate how much you’ll need to pay your tax bill at the end of the year. Plan ahead and set the money aside in a high yield savings account like the ones from ING!
Do you have self-employment income, and are you paying quarterly estimated taxes this year? Do you find the process a bit confusing, or have you been doing it long enough that it makes complete sense? Tell us about your tax paying experience (good and/or bad!) in the comments!
Kevin@OutOfYourRut says
Thanks for the reminder! Kevin
Kevin@OutOfYourRut´s last blog ..You have the ability and talent to make your dreams come true
Miranda says
Today is the day! Sending my check out today. If you send it late, they charge you interest. Last year, I forgot and sent one payment about two weeks late. I had to pay $1.34 in interest. It’s not much, but it served as a good reminder that if you don’t make your estimated payments, you could owe even more.