New to Estimated Taxes? The Rules
We’re into the fourth quarter of 2016: Have you been keeping up with your estimated income taxes?
There are a lot of advantages to being self-employed, like—usually—no designated times you must be in an office somewhere. No dress code. Running to Costco when it’s not jammed. Having your dog as your administrative assistant and non-judgmental co-worker.
But if 2016 was your first year of being your own boss, we hope that you’ve acquainted yourself with the most onerous disadvantage to being self-employed: the self-employment tax. We hope, too, that you’ve already made three estimated tax payments on your 2016 taxes, and you’re planning for the fourth, which is due on January 17, 2017.
Not the Only Ones
It’s not just the self-employed who must pay estimated taxes. U.S. taxpayers who don’t have the requisite funds deducted regularly from their paychecks are expected to submit a payment four times a year on dates determined by the Internal Revenue Service (usually the 15th of April, June, and September, and January of the following year, unless those days fall on a weekend or holiday). This applies to anyone who expects to owe $1,000 or more in taxes at filing time, including people who:
- Receive interest or dividends,
- Receive rent from tenants,
- Sold an asset, or,
- Are living on a combination of Social Security and pensions, and don’t have enough withheld to cover their tax bills.
Note: Farmers, fishermen, and some high-income earners may have special rules applied to them. If you have non-W2 income and are at all uncertain of your estimated tax obligation, please talk to us.
The IRS provides printable vouchers on its website that you can complete and mail in to the agency, accompanied by a check or money order. Be sure to submit your payments to the address assigned to your state; you’ll find this information on the Form 1040-ES, the same page where vouchers are located. If your business is a corporation, you’ll usually use Form 1120.
You can also pay by debit or credit card over the phone or online through one of the IRS’s approved payment processors. These incur additional fees. Or you can use the IRS’s own phone and online system, the Electronic Federal Tax Payment System (EFTPS). This is a free U.S. Department of Treasury service, but you’ll have to enroll to use it.
Note: If you absolutely can’t pay or want to consider an annualized alternative, we can tell you about your options.
If you think you should have been submitting tax payments throughout 2016 and haven’t, you should by all means try to catch up as soon as possible. You may be subject to some penalties, but the sooner you attend to your obligation, the better. If you wait until you file to pay what you should have been paying throughout the year, you may find it difficult to pay your entire tax obligation all at once. And you’ll need to start paying the next year’s estimated taxes at the same time.
Calculating Your Estimated Tax
This, of course, is the hard part. The IRS provides a very complex worksheet for corporations, and the Form 1040-ES offers some help to other taxpayers. If you are an individual or business whose adjusted gross income, taxable income, taxes, deductions, and credits haven’t changed that much from the previous year, you might use that return as a model as you begin to estimate.
But tax law changes from year to year. And especially if you’re self-employed, work in a seasonal business, or have an unexpected windfall or financial crisis, coming up with a good estimate that neither leaves you with a lot to pay at filing time nor unnecessarily ties up funds in taxes can be quite a challenge.
So if you have income beyond W-2 compensation and you want to be in compliance with IRS requirements, what’s the answer? Year-round tax planning. Tracking cash in and out month by month and quarter by quarter is the only way to ensure that you’re not in for a big surprise when you file. So contact us, and together we can put together a strategy for dealing with your estimated taxes.