Taxpayers pay most of the tax they owe throughout the year via withholdings from their paycheck. If your employer doesn’t withhold money from your paycheck for tax (for instance, you’re paid as a contractor), it’s likely you need to pay estimated taxes each quarter.
Estimated tax is the primary way that states and the IRS tax income that isn’t subject to withholding.
If you answer yes to any of the following, you may need to pay quarterly taxes:
- You earn 1099 income, such as self-employment income, interest, dividends, capital gains, and the like.
- You expect to owe at least $1,000 in tax for the current year.
- You expect your tax withholding and refundable tax credits to be less than the smaller of:
- 90% of the tax on your tax return for the current year; OR
- 100% of the tax on your tax return for the previous year.
The rules are slightly different if you work as a farmer or fisherman (such that it constitutes at least ⅔ of your income), if you’re in a high income tax bracket, if you employ people in your household, or if you’re a nonresident alien. Check the IRS website for the most up-to-date rules.
“How much estimated tax do I owe?”
You can use Form 1040-ES to calculate your estimated federal income tax and how much you should pay throughout the year to avoid paying a penalty. After you have determined your total estimated tax for the year, you then determine how much you should pay by the due date of each payment period to avoid a penalty for that period.
Keep in mind: If your income fluctuates significantly from expectations (in other words, you start to earn significantly more or significantly less), you may want to revisit the 1040-ES and adjust your estimated payments. If you don’t pay enough during any payment period, you may owe a penalty even if you are due a refund when you file your tax return.
Payments are due April 15, June 15, September 15, and January 15 (or the following Monday if those dates fall on a weekend).
Keep in mind: Withholding and estimated tax payments may also be required for state and local taxes. Check with your state government for more information.
For more comprehensive help, consider consulting with a tax professional or reach out to a Bogart Wealth Financial Advisor, as you may benefit from a more comprehensive tax plan.
