What is an Estimated Tax Payment?

Yesterday a new article was published at the RoniDeutch.com learning center. This new article explains estimated tax payments, and offers answers to a handful of questions related to quarterly tax payments.

Estimated tax payments are a method used to calculate and pay income tax on income that is either not subject to withholding or due as a result of insufficient withholding. Income not subject to withholding includes: Unemployment benefits, Self-employment income, Alimony, Interest, Dividends, Rent, Awards, Prizes, and asset-Sale gains.

As a general rule, if a taxpayer is self-employed or has any other non W-2 income, that taxpayer may need to pay estimated taxes each quarter.

How do I Know if I Need to make Estimates Tax Payments?

By following this chart, you may determine whether or not you need to make Estimated Tax Payments:

1) Do you expect to owe less than $1000 in taxes for 2010 after subtracting withholdings & credits from the total amount of taxes you expect to owe?

If Yes, you do not need to make ETP.

If No, proceed to the next question.

2) Do you expect your withholding to amount to be at least 90% of the tax you will owe for 2010?

If Yes, you do not need to make ETP.

If No, proceed to the next question.

3) Do you expect your withholding to be at least 100% of the tax on your 2009 return?

If Yes, you do not need to make ETP.

Continue reading at RoniDeutch.com…

Common Questions About Estimated Quarterly Tax Payments

The June 15^th deadline for making estimated payments to the IRS is only a few days away. To help confused taxpayers, the RDTC Tax Help Blog has posted an entry with answers to the 10 most common questions about quarterly tax payments. I have included a few of questions and answers below, but you can find the full list at RDTC.com.

What federal taxes am I required to include in my quarterly payment?

In your estimated quarterly payment you must pay your federal income tax, as well as Social Security and Medicare taxes, which are known collectively as the self-employment tax. The amount of tax you are required to pay will depend on your income level.

When are my quarterly tax payments due?

The federal due dates for estimated tax payments are April 15, June 15, September 15, and January 15. However, if one of these dates falls on a weekend or legal holiday then the associated payment will be due the following business day.

What forms do I need to use to file my payment?

To file your quarterly payment you will need to complete IRS Form 1040-ES. If you cannot download it online, then you can get a copy at a local IRS office or by calling 800-TAX-FORM.

My business is setup as a partnership; will I still need to make estimated tax payments?

Yes, you and your partner will both need to make quarterly payments unless you are paying yourself wages and are having the necessary taxes withheld from your paychecks.

Questions for the Tax Lady: June 7th, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: I do not usually itemize my tax return, but I have an old vehicle I was planning on donating to charity. Can I still claim the donation as a charitable contribution on my next return?

Unfortunately, no. You can only take advantage of the charitable contribution donation if you itemize your return, meaning you do not claim the standard deduction. For more information on charitable contributions, check out this article on the RDTC Tax Help Blog.

Question #2: Roni, I am a self-employed taxpayer. Is my next estimated quarterly payment due on July 15^th or June 15^th?

The next quarterly payment due date is actually June 15^th, even though it has only been two months since your last payment was due (April 15^th). Your next payment will be due on September 15^th, and then four months will go by before the final payment is due.

Questions for the Tax Lady: April 19th, 2010

Check out the following new Questions for the Tax Lady answers. As always, feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: What are the IRS deadlines for estimated quarterly payments?

The first estimated quarterly payment for 2010 was actually due last week (April 15^th). However, if you missed the deadline then you should calculate your payment and get it in as soon as possible. The IRS typically does not have a problem with estimated payments that are only a few days late, and if you get your in by the end of the week then you probably will not need to worry about any late penalties. I’ve listed the rest of the estimated payment due dates for the year so you can avoid being late next quarter.

• April 15, 2010
• June 15, 2010
• September 15, 2010
• January 15, 2011

Missed the Quarterly Payment Due Date?

Although the estimated quarterly tax system was made to make taxes simpler for business owners and self employed taxpayers, sometimes it seems like they do just the opposite. The economy is making life more difficult on millions of Americans, and it can be very easy to miss an estimated quarterly due date. For those of you who may have missed last week’s June 15 deadline, I’ve put together the following article explaining what you can do.

Do Not Worry

First of all, do not worry. If you miss the quarterly payment by a few days then the IRS probably will not assess any penalties or fees, but you should still get your payment in the mail as soon as possible. The IRS’s main concern is that they get their money, and as long as you get yours to them within a couple of days then you should be fine.

Do Not Wait

Although some people will tell you it’s fine to just include more money in your next quarterly payment, this option can have serious consequences. The IRS wants self-employed taxpayers to make regular quarterly payments, and can enforce heavy fines if you wait. Unless you did not have any profit this quarter then you want to get your payment mailed out ASAP.

Get Professional Help

Calculating your own estimated payments is actually pretty simple—see The Truth About Estimated Quarterly Tax Payments on the RDTC Tax Help Blog—but if you are confused then you might want to seek out professional help. Not all tax preparation offices are open year round, so you might need to find an accountant. Additionally, most Roni Deutch Tax Center franchises are open year round and can help with estimated payments. To find a store close to you, check out the Locations Page on RDTC.com.

If You Need Time

If you cannot afford your entire tax payment right away right away then you can take another route. One common option is to simply pay by credit card. That way you take care of your tax liability with the IRS, and pay off your credit card balance whenever it is most convenient for you. You could also just pay what you can now, and pay the rest over time as you can. If the IRS sees you are making steady payments on the total, they are probably not going to penalize you much, if at all.

Confusing Dates

The name "quarterly payments" has misled more than one taxpayer. Since they are quarterly, it would be correct to assume you need to pay every three months right? Wrong. There is actually only a two month space between the April 15^th, and June 15^th due date. Later in the year you also have a four month quarter to make up for the reduced spring time quarter.

Avoiding Missed Payments

There are several ways you can make sure you do not make this mistake again. Put the due dates (April 15th, June 15th, September 15th, and January 15th) in as many places as you need to in order to remember. This can include your calendar, planner, iCal, a date book, or even a sticky note on your desk. You may even be able to set an alert on your cell telephone months ahead of time.

The Truth About Estimated Quarterly Tax Payments

The June 15^th deadline for the second quarterly 2009 tax payment is only a few days away. If you are required to make a payment, and are looking to save money this year, then check out this entry from the Roni Deutch Tax Center – Tax Help Blog with details on how you can calculate your own payment.

Who needs to make estimated quarterly tax payments?

According to the IRS, “in most cases, you must make estimated tax payments if you expect

to owe at least $1,000 in tax for 2009 (after subtracting your withholding and credits) and you expect your withholding and credits to be less than the smaller of:

90% of the tax to be shown on your current year’s tax return, or

100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)”

So basically, if you have any income over $1,000 that has not had federal taxes withheld then you will need to make quarterly payments. This applies to any source of revenue, from self-employment earnings to interest and dividend payments.

When are they due?

Some first-time quarterly taxpayers may get a little confused, because the "quarterly" payments are not divided in to exact quarters. While the reason for this is unclear, just be sure to put the exact dates in bold letters on your calendar. That way you can avoid being hit with a late penalty.

For income earned Jan. 1—March 31, due by April 15

For income earned April 1—May 31, due by June 15

For income earned June 1—August 31, due by September 15

For income earned Sept. 1—Dec. 31, due by January 15

These are the due dates for quarterly payments, but do not forget you also have the option of making monthly payments. Some prefer the monthly option because the payments are much smaller and more manageable.

How do I calculate an Estimated Tax Payment?

Although it seems complicated at first glance, estimated quarterly tax payments are not all that difficult to calculate, and the whole process should take no more than an hour or two. To complete the calculations, you will need: last year’s tax return, a calculator, a pen, and piece of paper. There are a couple of ways to calculate how much you owe, and for more details you can download IRS Form 1040-ES, but the details below explain one of the simplest methods.

Discover your average tax rate by pulling out last year’s tax return. To do so, divide your income tax from last year (should be line 43 on an average 1040) by your adjusted gross income from last year (line 37). You then multiply this number by your total income for this quarter. If you are a self-employed individual, you will need to add additional costs for Medicare and social security, usually about 15.5%. For more details on calculating your payment, we highly recommend you seek advice from a professional tax preparer.

How do I make the payments?

Estimated quarterly tax payments, once estimated, are very simple to make. One way is to write a check for the amount and send it to the IRS along with a 1040-ES voucher form. You also have the option to make payments quickly online through the electronic federal payment system. Check out https://www.eftps.gov/eftps/ for more information.

Are You Required to Make Estimated Tax Payments?

Few things are more confounding to taxpayers than estimated tax payments. Moreover, few things get taxpayers into more trouble.

Estimated tax payments are supposed to be made quarterly by any taxpayer whose taxes aren’t withheld from their income. If you work for a company and they withhold taxes for you, including Medicare and Social Security, then you probably don’t have to make quarterly payments. But, if you also do some other work on the side, like selling Avon or doing freelance work, you are required to pay taxes on that income.

If you are an independently contracted worker, or self-employed, then you need to pay income and Social Security taxes on your income. How much you will pay depends on how much you make and your general tax situation. A good estimation is to take a look at your most recent tax return. Take your total tax liability and add 15% to account for Social Security and Medicare taxes. If you predict having similar income and deductions this year, then you can take the total tax liability, divide it by four, and that’s your estimated quarterly payment.

Making these payments may seem like a hassle, but as I mentioned, not making these payments gets so many taxpayers in trouble with the IRS. If you don’t make them, the IRS may penalize you at tax time, or you might be saddled with more tax liability than you have the ability to pay. Just think about it, if your total tax liability for a year is $5,000, paying it all at once is probably going to hurt. But planning ahead and paying $1,250 every quarter is probably more manageable. Alternatively, you can make monthly payments, if that is easier for you. Simply divide your total tax liability by 12.

Small business owners have historically failed to make accurate and timely tax payments. The IRS figured this out and now heavily scrutinizes any self-employed people and small-business owner tax returns. This can lead to audits, penalties and enormous tax debts. From my experience, this is one of the top reasons people get in debt to the IRS. And in this case, an ounce of prevention is worth a pound of cure.