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Paying Estimated Taxes

Who Must Pay Estimated Taxes?

Unlike employees, who have who have taxes withheld from their pay, self-employed taxpayers do not have taxes withheld from their businesses earnings. You must pay estimated taxes if you are a sole proprietor, general partner in a partnership, or member in a limited liability company. 

Your estimated tax payments must cover not only your federal income taxes for the year, but your self-employment taxes (Social Security tax and Medicare tax) as well.

Partners and LLC members must pay individual estimated tax on their shares of the partnership or LLC net income, whether the income is actually paid to them or not.

When are Estimated Taxes Due?

Unfortunately, the IRS wants its money during the year. Estimated taxes are paid four uarterly installments. The dues dates are the 15th day of April, June, and September (in the current tax year), and January 15th (of the following year.) Don't get confused by the fact that the January 15th payment is the fourth estimated tax payment for the previous year, not the first payment for the current year. Your payments must be postmarked by the due dates, but the IRS need not actually receive them then.

April 15th can be difficult because you not only have to pay any income tax due with your tax return, you also have to make your first quarterly estimated tax payment for the current year as well.

If you fail to make timely and appropriate payments, you could be subject to additional taxes, along with IRS penalties and interest charges.

How To Pay?

You have four choices of how to pay the IRS:

1-By mailing the IRS a check and IRS Form 1040-ES 

2-Electronically, through the IRS EFTP System (you must enroll in the system, it's free) Call 800-555-4477

3-By electronic withdrawal from your bank account, (using the IRS Direct Pay option)

4-By credit or debit card (the IRS website www.irs.gov lists approved vendors).

How Much You Must Pay?

The IRS imposes penalties if your don't pay enough estimate tax during the year.

To avoid IRS penalties for underpayment of tax, all you have to do is pay at least the lesser of:

1-90% of your total tax due for the current tax year, or

2-100% of the tax you paid the previous year (100% if your Adjusted Gross Income of more than $150,000 or $75,000 if married filing separately)

The easiest and safest way to calculate your estimated tax is to pay 100% (or 150% if applicable) of the total federal taxes you paid last year, since this already known. Take this total, divide by four, and this is the amount to ay each quarter.

If you do not pay enough, you will owe tax and possibly incur IRS penalties and interest charges. If you pay too much, you will receive a refund. which you can have the IRS send to you or you can apply all or a portion of it to the following year's estimated taxes.

Keep Good Records

Mistakes do happen. at the IRS. It's a good idea to keep documentation of your payments to be sure the correct amounts are applied to the correct year. 

A Final Tax Tip:

If you have various soucres of taxable income where no income taxes are withheld, such as Social Security, Annuities, IRAs, Pensions, capital gains, dividends, interest, estate, or trust income -- you will need to consider making quarterly estimated tax payments for this income as well.