If you’re a freelancer, self-employed professional, a business owner or investor, you know that paying taxes can be overwhelming. One of the most confusing parts of the process is estimating how much you owe. It’s not uncommon for people to make mistakes that can lead to an underpayment penalty. That’s why understanding estimated taxes is essential. In this post, we’ll dive into the basics so that you can get a better idea of what you owe and avoid any surprises come tax season.
What are Estimated Taxes?
Estimated taxes are simply payments you make in advance to cover your tax obligation throughout the year. In the United States, federal taxes are a pay-as-you-go system, which means that taxpayers are responsible for paying their taxes throughout the tax year in four installments: April 15, June 15, September 15, and January 15 of the following year. These payments are based on the income you earn that is not subject to tax withholding, such as self-employment income, interest, dividends, rents, and gains from the sale of assets.
How to Calculate Estimated Taxes?
To estimate your taxes, you first need to calculate your taxable income. This is different from your gross income, which is the money you earn before taxes. Your taxable income is your gross income minus any deductions and exemptions you may be eligible to claim. Once you have your taxable income, you can use the tax tables or the online tax calculator provided by the IRS to determine your estimated tax liability. Keep in mind that these calculators only provide a rough estimate and do not consider any changes to the tax code.
When to Pay Estimated Taxes?
As mentioned earlier, you’re required to make four estimated tax payments throughout the year. If you fail to make these payments or underestimate how much you owe, you may face an underpayment penalty from the IRS. The penalty is calculated based on how much you underpaid and the amount of time you’ve been underpaid. To avoid this penalty, make sure to submit your estimated payments on time and accurately.
| Individual Estimated tax Payment Due Dates | |
| For the period of: | Date Due: |
| January 1 – March 31 | April 15 |
| April 1 – May 31 | June 15 |
| June 1 – August 31 | September 15 |
| September 1 – December 31 | January 15 |
| If you pay and file your tax return by January 31, you do not need to make the January 15 installment payment. | |
How to Make Estimated Tax Payments?
Paying your estimated taxes is easier than you might think. The IRS can take payment via check, cashier’s check, money order, credit card, debit card, digital wallet (PayPal, Venmo), or cash. That’s right, you can pay cash at an IRS retail partner.* So, that means you can pay via mail, phone (1-800-555-3453) , online, mobile app, or in person. You can also make a payment at a Taxpayer Assistance Center, call 844-545-5640 to schedule an appointment.
How to Stay on Top of Your Estimated Taxes?
Keeping track of your estimated payments can be challenging, but it’s crucial to make sure you’re not underpaying or overpaying. One way to stay on top of your estimated taxes is to use a spreadsheet or tax software program to track your income, deductions, and payments. This will help you calculate how much you owe and whether you’re on track with your payment schedule. It’s also important to keep your records organized and to save all your receipts, invoices, and statements to substantiate your deductions and income if you’re ever audited.
Just in case, here is the link to the IRS Publication 505
Understanding and managing your estimated taxes can be stressful, but with the right knowledge and tools, you can streamline the process and avoid any penalties or surprises. Remember to stay organized, track your payments, and make timely payments throughout the year. Don’t forget to consult a tax professional or use the IRS resources if you have any doubts or questions. By doing so, you can stay compliant and take control of your finances.
*Some IRS retail partners: Dollar General, Family Dollar, CVS, Walgreens, Walmart, Pilot Flying J, 7-Eleven, Speedway, Kum & Go, Stripes, Royal Farms, GoMart, Sheetz, Rutters, Travel America, and Kwik Trip.
*** This article is for informational purposes only and does not constitute tax, legal, or financial advice. Before making any decisions related to taxes, please consult a licensed CPA, Enrolled Agent, or other qualified professional. ***
Other posts that might interest:
Taxable Income: What You Need To Know
Tax Deductions: Should You Itemize Or Take The Standard Deduction?
