One of the perks of traditional employment is that taxes will be automatically withheld from each paycheck, but those who strike out on their own have to make regular payments throughout the year to cover both their state and federal tax liabilities.
If you run a small business or are self-employed (even if it’s just on the side) you’ll need to make quarterly estimates to avoid facing penalties.
Estimated taxes are due 15 days after the end of each quarter. The deadlines have been a bit skewed in 2020 due to the coronavirus, with the first and second quarter estimates being pushed back to July 15th, but it’s business-as-usual moving forward.
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Your 3rd quarter estimated taxes are due on September 15th for all income earned from June 1st to August 31st.
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How to Calculate Your Payments
To calculate your quarterly payments, you’ll need to estimate your total tax liability for the year and divide it by four. This should include both your self-employment and income taxes.
Individuals have to make estimated quarterly tax payments if they calculate an annual tax liability of at least $1,000 for the year, while the cutoff for corporations is $500 or more for the year.
Feel free to use the worksheets in Form 1040-ES or Form 1120-W to help calculate your tax payments for individuals and corporations respectively.
How to Avoid Penalties
- If you estimate your taxes incorrectly or fail to make your payments on time, you could be hit with a penalty, usually .5% of the outstanding balance each month until it’s paid.
To avoid that, there are a couple of safe harbors you can take advantage of. You can always avoid penalties if: - Your estimated tax payments are at least 90% of your current-year tax liability
Your estimated tax payments are at least 100% of your prior-year tax liability (110% if your AGI was greater than $150,000)
How and Where to Pay
The IRS has made it incredibly easy to pay your estimated taxes online.
You can visit their website to see all the accepted methods. If you’d prefer to use traditional means, they’ll also accept cash or checks in the mail.
Remember that you may have to make state payments as well, depending on where you live. Though state deadlines often align with the federal due dates, make sure you confirm your specific state’s requirements.
Minimize Complications With IRS
Having a Certified Public Accountant on your team makes it easier to deal with all of your tax planning problems. In addition to helping you calculate and make your estimated tax payments, Valor CPAs provides comprehensive tax services for both businesses and individuals.
We’ll ensure that you stay tax compliant with local, state, and federal tax laws. Feel free to schedule a free consultation to learn more about all the ways we can make your taxes as painless as possible.
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