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Quarterly Estimated Tax Payments
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The tax system in the United States is often called a “pay as you go” system because you are expect to pay taxes as you earn your income. For most W-2 employees, your taxes are withheld with every paycheck and this requirement is easy to satisfy. If you are a freelancer or otherwise earn income from other means throughout the year, you have several options when it comes to keeping with the “pay as you go.” If you have a job that withholds, you can adjust your withholding so that extra income is withheld for taxes to cover your freelance income. If you’re a 100% freelancer or a small business owner, you’ll have to pay quarterly estimated tax payments.
Quarterly estimated tax payments aren’t as scary as they sound but there are specific forms you need to include, the Form 1040-ES.
Quarterly Estimated Tax Payment Due Dates
As you’d expect, there are four estimated payment due dates, here they are for 2012:
- April 17, 2012
- June 15, 2012
- September 17, 2012
- January 15, 2013
Each one covers a slightly different time period so you’ll have to calculate your taxes carefully (I don’t know why the 2nd payment is due in June instead of July). Officially, the dates are April 15, June 15, September 15, and January 15 but as is the case with the tax filing date, the due date shifts for weekends and holidays.
Safe Harbor
One point to remember about estimated tax payments is the safe harbor rule. The IRS understands that sometimes it’s difficult to estimate your taxes so they offer up the safe harbor rule to protect you from penalties, should you underpay your actual tax liability. If you pay at least your previous year’s liability or pay within 90% of your actual liability, you won’t be penalized for underpayment. So if your total taxes paid last year was $10,000, if you pay at least that much this year, through withholdings and estimated payments, the IRS will not penalize you if you underpay your actual liability. State safe harbor rules may differ (Maryland, for example, requires you to pay at least 110% of the previous year’s liability).
Lastly, it’s also important for you to look up the quarterly estimated tax payment schedules and forms for your state, which will usually, but not always, mirror that of the federal dates.
(Photo: alancleaver)
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If you ever find yourself coming up short on your quarterly payments near the end of the year, you can have your employer (if you’re employed by someone else) withhold more in your last paycheck or two and the government counts that withholding as being withheld throughout the year even if it’s not.
Clever protip, thanks Scott!
My wife has her own small company – rather than pay quarterly taxes on this company – I just have extra money taken from my paycheck.
Is this 100% legal – not sure but I’m since we get $ back every year I think its fine.
100% legal, and practical. The fact that you get $ back every year means you may need to adjust your withholding.
However, paying estimates gives you a little more flexibility. If the company is having a bad year, you can pay in less in estimated taxes. Most people do not meddle with their withholding exemptions from year to year to account for this.
Also, keep in mind that some people with adjusted gross income over $150,000, will ave to pay in 110% of their prior year tax liability to meet the safe harbor.
You can also use 90% of the current year tax liability as a safe harbor. This is usulally a little tougher to calculate in some cases since you may not know what the exact earnings until well after year end. If you estimate wrong, there could be some penalties.
BEWARE: If paying on-line, please ensure you identify the correct tax year; else monies will be applied to the wrong year.
Correcting the above error or over-paying truly takes some effort to get your monies in the right year or refunded if overpaid!
This is one site where you do not have a Confirm Screen!
I have never before had to pay quarterly tax payments since any side income atop my W2 income was negligible. I started a side business in late 2010 and while it was profitable, I still ended with a 2010 refund. In 2011, things started taking off. I don’t yet know my 2011 liability, but am I correct that I can take that resultant liability, divide it by four, and in addition to paying my 2011 liability on April 17th, pay this ‘divided by four’ number on April 17th and each quarter thereafter through Jan 15, 2013 and be compliant?