The 2016 tax filing deadline is barely in our rear view mirror and you probably don’t want to think about taxes for a long, long time. However, now is exactly the time to start thinking about your 2017 tax liability so you can avoid penalties and tax liability surprises come next year. Estimated taxes can be intimidating; but armed with an understanding of the requirements you can take charge of your personal tax liability and be better prepared! If you are self-employed, thinking of starting a business, or find yourself having to write a check to the IRS each April – read on!
Paying Estimated Taxes? When You Should
It’s not just the self-employed who must submit estimated taxes. IRS obligations are pay-as-you-go.
Much as we may grumble about them, estimated taxes and payroll withholding are good things. Imagine preparing your taxes in April having not paid in anything through the 12-month tax period. Chances are, a large percentage of taxpayers would be filing extensions (which doesn’t get you off the hook for paying by the April deadline: You’re still expected to submit an estimate of the tax due).
If you’re a salaried or hourly employee of a company, it’s up to your employer to collect and submit an estimate of your income tax obligation every pay period, based on the withholding information you provided on your W-4.
The number of allowances you claim affects how much money is taken from each paycheck for taxes. If an insufficient amount is withheld, you may need to pay estimated taxes to avoid penalties.
But if you’re a freelancer or contractor who has no money withheld, the burden is on you. The IRS expects you to do the same thing an employer would: periodically (every three months) make a payment that approximates what you would owe for that quarter. Then, like everyone else, you’ll include that information when you prepare your income taxes, at which time you’ll either get a refund or have to pay in.
Everyone Is Subject
What this means is that the IRS expects all taxpayers to keep up with their taxes throughout the year. If you’re not having enough taken out of your paycheck, you should be submitting estimated taxes. You’ll avoid paying penalties, and you probably won’t have to file an extension.
Even if your withholding is working well for you, there may be times when you have extra money coming in because of things like alimony, interest and dividends, and prizes. You’ll need to factor this into your income. If you’re a sole proprietor, partner, or S corporation shareholder, and you believe you will owe $1,000 or more in taxes for the 2017 tax year, you’re expected to make quarterly payments. For corporations, the cutoff amount is $500.
Note: The IRS has different requirements for farmers, fishermen, certain household employers, and some high-income taxpayers.
Unless you’re paying electronically, you’ll need to visit this IRS page to print your estimated tax vouchers.
A Complex Calculation
Unfortunately, there’s no magic formula for calculating the estimated taxes you should pay every quarter. That’s why they call them “estimated.” And changes to the tax code aren’t finalized by Congress until the end of the year, by which time you should have made three payments (April 18, June 15, and September 15, 2017; your final quarterly payment is due January 16, 2018).
You can use the worksheet that the IRS supplies (you’ll find payment vouchers here, too). If you’re using accounting software or a website, it’ll be much easier to assemble the numbers. If your financial situation hasn’t changed much since the previous year, you could use your most recent return as a model.
The IRS offers multiple ways to make your quarterly estimated payments electronically. In fact, the agency encourages it.
Don’t Forget State
Do you live in a state that requires you to pay income taxes? If so, you’ll need to check with your state tax agency to see how to handle state estimated taxes. The Small Business Administration (SBA) maintains an online directory that you can consult to locate the appropriate website.
There’s no reason to add penalties to your tax bill when paying estimated taxes can help you avoid that. Although there is no quick answer for everyone on how much to pay; just knowing what your payment requirements are is an important step in planning for and managing your taxes each year. If you need help calculating your estimated payments seek the advice of a trusted CPA.