If you have income that does not have tax withholding, chances are that you will need to pay estimated tax to the IRS. Estimated taxes are required for corporations, partnerships, S corporation shareholders, sole proprietorships and – in certain circumstances – individuals.
Estimated taxes are calculated on income where taxes were not withheld. Just like a regular employee has taxes taken out of every paycheck so they make small payments throughout the year, taxpayers and entities that do not have taxes withheld from their income also have to make payments during the year. Even if the majority of your income has taxes withheld, you may have other income that qualifies for estimated tax, like dividends, prizes, and gains from selling assets.
Who is Required to Pay Estimated Tax?
There are several reasons why you might be required to pay estimated taxes, but the common denominator is having income that does not have tax withholding. In some cases, it depends on the amount of tax you expect to owe for the year.
For a corporation, if you expect to owe $500 or more in taxes for the year, you must pay taxes throughout the year. For a sole proprietorship, partnership, S corporation shareholder, or a self-employed person, you are generally must estimate tax payments if you think you will owe $1,000 in taxes for the year.
Finally, if you owed taxes in the previous year on dividends, interest, cash awards, or other income, you could be subject to withholding. If you were a citizen or resident of the U.S. for the entire previous year, the tax year was 12 months long, and you did not owe taxes, you are not subject to estimated taxes. Refer to the worksheet in Form 1040-ES to help you determine whether you need to worry about this.
How Much Will You Owe?
Sometimes it can be a little tricky to figure out exactly how much is owed each quarter because most people do not know exactly how much they will end up earning for the year. The trick is to avoid being charged penalties and pay as little as possible (why give the government an interest free loan?).
In order to avoid getting charged penalties, at least 90% of the current year taxes must be paid (in equal quarterly payments unless you are able to show income was earned at different points through the year on your tax return). If you are unsure of what your total tax liability is going to be for the year use one of the following methodologies.
- Pay 100% of the 2010 tax liability if income was $150,000 or less
- Pay at least 110% of prior year tax liability if income was over $150,000.
How to Pay Estimated Tax Payments & Due Dates
Paying estimated tax payments is quick and easy. If you are making estimated tax payments as a sole proprietor, partner, S corporation and/or a self-employed individual, mail IRS form 1040-ES (you only need to provide the quarterly voucher, the worksheet does not need to be filled out. You can use the worksheet to help you figure your estimated tax payment or use one of the methodologies mentioned above) with your check to your IRS processing center. Be sure to make the check payable to “United States Treasury” and put your Social Security number and “Form 1040-ES” in the notes of the check. The due dates for estimated tax payments are the following:
2014 Estimated Tax Payment Due Dates
- April 15th 2014: For period 1/1/14-3/31/2014
- June 16th 2014: For period 4/1/2014-5/31/2014
- September 15th 2014: For period 6/1/14-8/31/2014
- January 15th 2015: For period 9/1/14-12/31/2014
If you think you may be required to pay estimated taxes, it is a good idea to consult a CPA to make sure you calculate them correctly.