Determining how much to pay in estimated taxes for the current tax year isn’t an exact science.
It’s kind of ironic, really. The taxpayers who could most easily calculate estimated taxes — salaried individuals whose employers deduct funds for and submit their taxes — aren’t generally required to do so. But business owners and self-employed people, whose income often varies wildly throughout the year, and from year to year, must estimate what they will owe and send in a payment quarterly.
Actually, everyone who believes they will owe at least $1,000 when they file their 1040s is supposed to make estimated payments (though there are special IRS rules for farmers, fishermen, and some high-income individuals).
The easiest way to manage this task, of course, is to work with us. If you’re going to try to tackle it on your own, though, here are some suggested practices that will help prevent an unexpected amount due come tax preparation time.
- Use 2012’s data. If you think that your income in 2013 is going to be fairly comparable to last year’s, simply take your total unfunded tax liability (the tax dollars that you personally paid in through estimated payments and/or the payment you had to include when you filed) and divide it by four.
- Pay as you go. Well, you don’t actually have to submit micro-payments, but track your obligation every time you receive a check from a client. This would be most useful for taxpayers who work on a project basis, not small retailers who get paid for physical products. Look at last year’s 1040 and see what your tax rate was, and then deduct roughly that much from each check. Keep the money in a separate account.
- Use the method that the IRS suggests. Go to the IRS site and open Publication 505. There’s a link in the section titled How To Figure Estimated Tax that takes you to Worksheet 2-1 (Worksheet 2-3 helps you estimate self-employment tax). Read the instructions before you try to complete it.
You know that minor administrative tasks can sometimes cause you to procrastinate. So when the time comes to submit your estimated taxes, be prepared. If you didn’t have an overpayment from your 2012 taxes credited as an estimated payment for 2013, you should have already made your first payment on April 15, 2013. The other three will be expected June 15 and September 15, 2013 and January 15, 2014.
You can make more than four payments if you’d like, but be sure that you’ve sent in the correct estimated amount for each quarter by that period’s due date. And remember to pay estimated amounts to your state’s revenue department (if you’re in an affected state). Consult your state government website for instructions.
You can make your estimated payments online via credit/debit card or bank account withdrawal at the Electronic Federal Tax Payment System (EFTPS) site. You will have to enroll ahead of time to receive login credentials, so if you plan to use this system, get it set up ahead of time. You can also pay by phone (1-800-555-4477) or U.S. Mail (print out your vouchers here if you don’t already have them; you can also find the correct mailing address for your state here).
What happens if you don’t pay estimated taxes, or don’t pay them on time? As you might expect, you’ll be subject to IRS penalties. And you’ll have to come up with a much larger sum eventually than you would if you submitted your funds incrementally. So if you haven’t already, make this financial obligation a regular habit.