Business, Government, Taxes 

Paying Quarterly Estimated Taxes

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If you’re an independent contractor or own your own business, paying quarterly estimated taxes is no big deal and something you’ve grown accustomed to. For me, I’ve always worked for The Man (different Man’s, but always for The Man) and so The Man has taken care of this for me, withholding a little more than was necessary for me to cover my tax obligations. Thanks to the popularity of this blog I may have to start paying quarterly estimated taxes depending on how the numbers work out.

Usually, you can get away with not dealing with quarterly estimated taxes if the correct amount is withheld from your regular paycheck. In past years the income from this blog was small enough that the withholding, plus my deductions, still resulted in a small refund. However this year the income increased significantly and surprisingly so I didn’t even think to have payroll over-withhold this year in response.

When Do I Have To Start Paying? (and How Much?)
You don’t have to do anything until you expect to file a return in which you owe more than $1,000 (if it’s under $1,000 then the IRS will give you a pass on it). When that happens, if your adjusted gross income last year was under $150k then you can pay 90% of this year’s tax liability or 100% of your income tax liability from last year.

I make $100k and owed $16k last year in taxes, $14k of which was withheld from my taxes and thus “paid” before my return was due – leaving me a payment of $2k in April. This year I have two options: a) calculated what I think I owe this year and make sure the amount withheld from my paycheck and what I send in quarterly estimated taxes is over 90% of that guess, or, b) I make sure I pay at least $16k in taxes this year (because that’s what I paid last year).

The rules differ if you make over $150k in that Choice B (Paying 100% of last year’s taxes) goes to paying 110% of last year’s taxes. Form 1040-ES: Estimated Tax for Individuals is a helpful resource for first time estimated tax payers.

How Do I Pay?
You will use Form 1040-ES, referenced above, as it also contains the vouchers you must append to your payment. I don’t understand why the dates due are Jan 15th (of the next year), Sept. 15th, June 15th, and April 15th. If the April 15th applies to the 1st Quarter (Jan 1 – March 31), then June 15th is one month short of the 2nd Quarter (April 1 – June 30) right? The payments should be April 15th, July 15th, October 15th and January 15th (of the next year)… did the IRS mess up or did I miss something? When you pay, make out the check to the United States Treasury and include your SSN or EIN.

I haven’t actually paid estimated taxes yet so if anyone has any advice on the matter I would greatly appreciate it. Thanks!

{ 14 comments, please add your thoughts now! }

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14 Responses to “Paying Quarterly Estimated Taxes”

  1. Go with the Pros!

    Seriously, I “hired” a good CPA for this stuff. Usually what they charge you in fees is offset in what they can save you in Taxes. So their services are essentially free.

    When you’re into this working for yourself game you just gotta have someone who can stay on top of it.

    My accountant tells me exactly what to pay on the quarterly’s and who to make the checks out too.

    I like how you explain the rules though. I never knew how he came up with the numbers.

    \- Bryan

  2. Gina says:

    Good post Jim. One thing I’d like to add is that many small businesses (sole proprietors) who have to pay estimated tax payments are better off making annualized payments and these can become a bit tricky to compute, but can also lower the amount you have to pay each quarter, providing you with more cash to invest elsewhere.

  3. Why don’t you change the W-4 form at your employer so they can withhold a bit more. If you have cashflow concerns, usually you can increase salary withholding at the end of the year and still effectively meet your estimated tax obligation. Salary withholding is deemed as equally distributed by quarter regardless of how much is actually withhold by quarter.

  4. Foobarista says:

    We do the “extra withholding” strategy: figure out in April how much I need to withhold from my paycheck to hit the “safe harbor” and set up my withholding to hit that number. (I do a guesstimate in January so I’m not too far off.)

    Also, we set aside 40% of my wife’s self-employment income to a “tax escrow” savings account that we use to pay any extra income taxes, and to finish funding her self-employed 401K and Roth (in years when we can fund a Roth). Any money remaining in the account after this is our “tax refund” and goes into taxable investments.

  5. ChrisCPA says:

    As with our cash flows, I usually do a tax projection using YTD witholdings & earnings (taxable earnings) along with estimated year-end deductions, exemptions, credits & dividends/cap gains. I’m quite the dork, but I use these numbers to adjust my witholding about every three months – if needed.

    I’m an accountant & the software I use for my client tax returns calculates next years estimated payments based on current year figures. Their completed return includes coupons they use to make the estimates on the dates you mentioned – if needed. I’m not quite sure about the significance of the dates…I’ve only been practicing for a couple years…

    You are exactly right on all of the info you presented above. Great post!

  6. Catrijn says:

    Yes, the payment schedule is not actually quarterly – it’s been that way as long as I’ve been doing estimated taxes, and is always the same (april, june, september, january). I don’t find quarterly taxes are much more difficult than annual taxes (and I even annualize some years). If you don’t have major income changes during the year, you’ll basically end up doing your taxes twice (estimated and final); if you need to annualize, it’ll be four or five times. It’s generally not that much extra work, in my opinion – then again, my tax situation is fairly simple. I’d say that if you’ve easily done your own taxes in the past, you probably can still do them yourself. On the other hand, if your annual taxes have been a major pain, it might be time to get a pro to handle it on a continuous basis. Don’t forget that if you’re making quarterly estimated payments to the feds, you’ll probably need to do the same to the state as well.

  7. Matt says:

    I’m with the “hire an accountant” school of thought.

  8. Weekly Roundup – 10/20/06

    Here’s a quick look at posts that caught my eye over the past week (better late than never)…

    JLP has a nice post on building wealth with other people’s money.
    Jim gives us the skinny on paying estimated taxes on a quarterly basis.

  9. Tyler says:

    OK. I started working last year as a consultant (independent contractor really). I did not know I had to pay taxes quarterly and more importantly when I found out, I was told the first year you are paid that way you can wait till the end of the year, then following years you estimate your quarterly taxes and pay them, then, 4 times a year. Is this right and I should not be hit with fees? Or is it wrong and the $120++ in fees are legit?
    Please help! I really want to do my taxes myself, I did not realize the self employment tax would be sooooo high, need to save the money!

    • Jim says:

      The rule is that the IRS gives you one free pass. The first year that you owe, you get a free pass and there are no penalties. If you owe again the next year, you will be penalized unless you paid enough to fall into the “safe harbor” amount. The safe harbor amount is either 90% of what you actually owe, so if you paid $91 in tax and owed $100 for the year, you’re safe; or over 100% of what you paid in tax last year. So if you paid $100 in tax in 2007 and paid $101 in tax in 2008, but owed $120 in tax for 2008, you’re safe because you paid more than what you did in 2007.

      • Tyler says:

        Wonderful! Thank you!
        On TurboTax I was filling it out and it did not have a field to ask if I had filed taxes last year (I did not) so it automatically gave me a penalty of $120+ for not filing quarterly. I guess I need to call them for help with that matter. At least now I know not to pay that. Also, thanks for the “safe harbor” info. That will be useful because this year I will make 1/3 more than last so I will need to up my quarterly payments this year from only 1/4 of last.
        Appreciate the quick response!

  10. Mandy says:

    So I just wanted to make sure I understood the above comments correctly. I became a 1099 employee this year (in past years I’ve been full-time salaried employee). I haven’t paid quarterly taxes yet (I thought I had until July 15th, I agree that the dates are funky!)and was starting to panic when I realized it should have been June 15th that I paid. Am I understanding correctly that I don’t need to worry about quarterly payments this year because this is my first time as a 1099er? Thank you!

    • Jim says:

      Mandy – it doesn’t have to do with your 1099 status, it has to do with taxes due. You need to follow the safe harbor rules for tax payment. Don’t forget about local and state taxes too.

      • Mandy says:

        Hi Jim- Thanks for your reply! So, after reading the safe harbor rules, am I understanding correctly: Last year we received a tax return, so this year I will not pay any penalties. But, if I do owe at the end of the year, I could be at risk of fees if I were to underpay the following year, correct? Can I make estimated tax payments at any time? Or only on the quarterly dates? Meaning, I can make a payment now that catches me up for what I think I should owe from missing the last two quarterly payment dates? Thanks!

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