Estimated Tax Payments for Self-Employed Persons

Every taxpayer is responsible for the payment of his or her federal income tax and Social Security and Medicare taxes.  These taxes are usually withheld by an employer from an employee’s paycheck and reported on his or her W-2, but are not usually withheld from a contractor’s income and therefore not reported as deductions on a 1099-MISC.  Nor are they usually withheld from the following types of income:  interest and dividends, alimony, rent, sale of assets, and prizes and awards.  So self-employed persons may very well need to make estimated income tax payments.

You use estimated tax to pay both income tax and self-employment tax, as well as other required taxes that you report on your tax return.  A taxpayer who expects to owe $1000 or more when he or she files his or her tax return is generally required to make estimated tax payments.  The IRS may charge you a penalty if you do not pay enough through withholding or estimated tax payments.  And you will be charged a penalty if you do not pay enough by the due date of each payment period, even if you are due a refund for the tax year.

A corporation is generally required to make estimated tax payments if it is expected to owe tax of $500 or more when its return is filed, and uses Form 1120-W (Estimated Tax for Corporations) to figure and pay the tax.  Estimated tax requirements are also different for farmers and fishermen.

You do not have to pay estimated tax for 2010 provided that:  you had no tax liability for the previous tax year which covered a 12-month period; and you were a US citizen or resident for the whole year.  Having no tax liability means that your total tax was zero or that you did not have to file an income tax return.

You must pay estimated tax if the following 2 conditions apply:  you expect to owe at least $1,000 in tax for 2010 after subtracting your withholding and credits; and you expect your withholding and credits to be less than 90% of the tax to be shown on your current year’s tax return or less than 100% of the tax shown on your previous annual tax return.  These percentages may differ for farmers, fishermen and higher income taxpayers.

Use Form 1040-ES (Estimated Tax for Individuals) to figure and pay your estimated income tax.  The year is divided into four payment periods for estimated tax purposes. Each period has a specific payment due date, usually on or around the 15th of April, the 15th of June, the 15th of September and the 15th of January.

In order to know the amount of estimated tax to pay, you must reasonably accurately figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.  It may be helpful to use your last tax year’s tax return to help calculate this year’s income, deductions, and credits.  If at any time you realize that you have estimated your earnings too high, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If you realize your earnings have been estimated too low, you should likewise complete another 1040-ES worksheet to recalculate your estimated taxes for the next quarter. You should estimate your income as accurately as possible in order to avoid penalties.  You must make adjustments for changes in both your own situation and current tax law(s).

Estimated tax can be paid by check or money order using the Estimated Payment Voucher.  Or you can pay it electronically using a credit card, debit card, Electronic Funds Withdrawal, or Electronic Federal Tax Payment System (EFTPS).  Using the EFTPS system is an easy way to pay your business(es)’ federal taxes.  There is an option of paying the tax weekly, bi-weekly, or monthly, as long as you have paid enough in by the end of the quarter.  This system also allows you to access a history of your payments, so you know when you paid them and how much you paid.

As with federal income tax, there are similar regulations regarding the timely payment of each state’s income tax (if any) through estimated tax payments.  Your state’s department of revenue should be able to answer any questions you might have.

Additional information can be found at in Publication 505 (Tax Withholding and Estimated Tax).

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