If you’re in direct sales, you won’t have an HR department taking Federal taxes out of your paycheck for you – you’re on your own! In most cases, you can’t put off paying taxes until the end of the year or you’ll get hit with an underpayment penalty. To keep business owners and the the self-employed from racking up a huge tax bill, and to keep the money flowing into the IRS coffers on a regular basis, the IRS and many states require you to pay estimated taxes on your profits four times a year.
Tax (Photo credit: 401(K) 2012)
The name “estimated tax” comes from the process you’ll need to go through four times per year in order to know how much to send in. It can be a little annoying but if you stay on top of your accounting, making sure to enter your expenses and income on a regular basis, most accounting programs will make it pretty simple for you. Because of the progressive tax system, you’ll owe less in the first quarter than in the fourth quarter even if you had the same profit in each quarter. If you would like to spread it out, you can always pay more than you currently owe – making estimated tax payments is just intended to make sure you don’t end up paying too much less, or you’ll get hit with an underpayment penalty.
When Are Federal Estimated Taxes Required?
Generally, if you plan to make at least a $1000 in tax for 2012 after subtracting any withholding or refundable tax credits, then you must make estimated payments. To avoid the underpayment penalty, the IRS must have at least 90% of the tax shown on your tax return at the end of the year or 100% of the tax shown on your 2011 tax return, whichever is smaller. If your adjusted gross income is $150,000 or more, then substitute 110% for the former 100% figure.
How to Pay Federal Estimated Taxes
- 1. You’ll need to estimate your profit up to that point in the year. Most accounting programs such as Quickbooks can produce a profit statement for year-to-date. Remember, this is an estimate, so as long as you’re not off by much, this profit statement will be useful.
- 2. Alternatively, you can use this IRS Worksheet on page 5 to figure out what you owe each quarter in taxes. If most cases, if your state has an income tax you will need to do estimated payments as well.
- 3. Then, register with the Electronic Federal Tax Payment System or manually send it a check with a voucher. It’s very easy to set up but does take a week or so to complete your registration. Make your payment from your bank account. (You can even set up withdrawals up to 120 days in advance, if you’re the planning type.) If you’re a paper-and-pen sort of person, you can also send them a check, along with a voucher (which I do) on page 9 of the former link for the first quarter or page 11 for quarters 2, 3, and 4.
- 4. Keep a record of the tax payments you make during the year. The last estimated tax payment of the year is due January 15th of the next year. When you file your taxes, you’ll apply all those payments against your tax owed, and you should be pretty close!
Avoiding the underpayment penalty
The main reason to send in estimated tax payments is to avoid the underpayment penalty, which the IRS assesses when you haven’t kept current in paying taxes. While most of us think of April 15th as the day to write the big check, you’re actually required to send in taxes on the money you earn as you earn it, which most people with wages or salaries will have done for them by having money withheld from their paycheck. The IRS won’t be amused if you send them a lump sum of your taxes owed for the entire year on April 15th, and as with many other situations, they’ll express their displeasure with whopping fines. There’s no need to panic, however, because you’ll only get hit with this penalty if you’ve seriously underpaid. The IRS is mainly interested in getting its money, and as long as your estimates were done in good faith, you’ll be fine. You can do a more thorough job at the end of the year and make up any shortfall with the last payment on January 15th.
Each quarterly estimated tax payments is intended to cover the taxes on profit from that quarter. Here are the payment dates for your estimated tax payments for 2012:
- 1st Quarter (January 1st-March 31st): Estimated taxes due April 17th 2012
- 2nd Quarter (April 1st-May 31st): Estimated taxes due June 15th 2012
- 3rd Quarter (June 1st-August 31st): Estimated taxes due September 15th 2013
- 4th Quarter (September 1st-December 31st): Estimated taxes due January 15th for 2012
For 2013 the dates are as follows:
- 1st Quarter (January 1st-March 31st): Estimated taxes due April 15th 2013
- 2nd Quarter (April 1st-May 31st): Estimated taxes due June 17th 2013
- 3rd Quarter (June 1st-August 31st): Estimated taxes due September 16th 2013
- 4th Quarter (September 1st-December 31st): Estimated taxes due January 15th for 2014
For information on self-employed IRS tax tips visit TaxDebtHelp.com’s Blog by clicking here.