Tuesday, June 25, 2013

Tax Series #1: How do I make estimated tax payments?

As mentioned on our taxes page, taxes are technically due in four quarterly installment throughout the year (not one lump sum on April 15th). Most people don’t even think about this because it’s automatically done for you by your employer before the money even hits your bank account. But if you’re self-employed or have income from other sources, you may have to make these “estimated payments.” They’re estimated because you don’t actually know how much you’ll really owe until you file your tax return and come up with the final amount.

How much do I need to pay?

For federal taxes, there is a "safe harbor" rule to help you with the uncertainty. The total of your quarterly estimated payments (plus any withholding you have from other sources) must be at least the smaller of:
(a) 90% of the tax that you owe for the current year (which, again, is the number you're unsure of), or
(b) 100% of the tax shown on your prior year return (110% if you're considered "high income"--For 2012, you're considered "high income" if your adjusted gross income was more than $150,000.)

If you fall into that group of people that is required to file estimated payments and still have questions, check out the IRS website here. They actually have a respectable Q&A page that should answer all your questions about estimated payments. It includes a link to the actual vouchers (1040-ES) you'd send in with your payments. Page 9 of this document is a worksheet to help you calculated your estimated tax amount.

State Payments
Don't forget, if you owe estimated payments for Federal, you may owe quarterly payments to your state as well. We know, we know. Does the tax fun ever end?

1 comment:

  1. Thanks, Lisa! I think this will be really helpful for the people who need to start making estimated payments. Sometimes it's hard just to know where to start.

    ReplyDelete

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