Are you self-employed? A freelancer? Do you have a side job for extra income? If you’re not a W-2 employee, there’s a good chance that you’re not withholding any taxes, which means it’s up to you to set them aside for tax time. One of the most common mistakes made by contractors and free lancers is not setting aside the proper amount of tax; come April 15th, they have a CTP (“Crippling Tax Payment”) due that could put them in financial jeopardy! And to top it all off, if you expect to owe $1,000 or more in taxes, you are required by the IRS to make estimated tax payments throughout the year; if you wait until April 15th, in addition to the CTP, you’ll probably owe a penalty!
This doesn’t just apply to the self-employed, either. If you have over $1,000 of taxable income from interest, dividends, alimony, rent, gains from asset sales, prizes, or awards, and no taxes are withheld, then you’re also subject to paying estimated taxes.
The solution is simple: pay your estimated tax for each period throughout the year. For most taxpayers, the due dates are April 15th, June 15th, September 15th, and January 15th. Not only will this help you avoid potential underpayment penalties, but it will spread the tax burden throughout the year. If the income comes from a one-time event (the sale of an asset, winning a large cash prize, etc.), the smart move is to make one large estimated tax payment for that quarter to cover it.
So how does one pay? First, you’ll need to fill out Form 1040-ES (Click Here) to figure out your estimated tax due. You can pay by mail, by phone, or online using the Electronic Federal Tax Payment System (EFTPS). The EFTPS is a great way to pay, as you can schedule your payments weekly, bi-weekly, monthly, and more. EFTPS also keeps a history of your payments, so you’ll know how much and when you paid your estimated tax, great information for your CPA.
It’s not too late to start softening the tax hit – September 15th is coming up, and every dollar remitted now is one less you’ll have to remit in April. For those who have uneven income, it’s a good idea to recalculate your estimated taxes at least twice a year, if not more, to ensure you’re remitting the proper amount.
For more information, check out the IRS’ overview of estimated taxes (Click Here)