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What You Should Know About Estimated Tax Payments

If you are an independent contractor or business owner, you are responsible for making sure that you get the correct tax payments to the government — unlike people who work as employees of a company which withdraws payments from each paycheck. Estimated taxes are what you expect to pay on any salary you earn that isn’t subject to withholding, along with other income like interest, dividends and capital gains. For help figuring out your estimated taxes and make sure you don’t make any costly mistakes, consider working with a financial advisor.

Estimated Taxes Defined

Estimated tax is the amount you’re responsible for paying on earnings that aren’t subject to withholding. This includes income from dividends, awards, rent, self-employment and alimony. Anyone who’s receiving money from a pension or salary that’s subject to withholding may also owe estimated tax if they haven’t paid enough income taxes.

Who Pays Estimated Taxes?

What You Should Know About Estimated Tax Payments

Generally, you’re responsible for paying estimated tax if you’re self-employed or own a business as a sole proprietor, partner or an S corporation shareholder. If you file tax as a corporation, the IRS requires you to make estimated payments if you expect to pay $500 or more in taxes at the end of the year. The threshold goes up to $1,000 if you file as a sole proprietor or partnership.

Estimated Taxes: Calculating What You Owe

Figuring out what you’re going to owe in estimated taxes can be tricky if it’s your first time paying them. If you’re self-employed, you’re not only paying federal income tax but you’ll also owe a self-employment tax, which is currently set at 15.3%. Self-employment tax covers the taxes you’d normally have withheld for Social Security (12.4%) and Medicare (2.9%).

You’ll also need to add up your deductions. Those reduce your taxable income. From there you can factor in any credits you qualify for. If you’re not sure where to get started, the IRS offers a worksheet to help guide you through the calculations.

Estimated Taxes: Making Quarterly Payments

What You Should Know About Estimated Tax Payments

Normally, if you owe income taxes you have to pay by the April filing deadline (in 2022, the filing deadline is April 18) to avoid a penalty. But that’s not the case with estimated taxes. These are due four times during the year: in January, April, June and September.

If you don’t pay enough tax by the due dates, you may get hit with a penalty when you file your taxes by the deadline even if you’re owed a refund. To avoid the penalty, you have to owe less than $1,000 in tax. Or you can pay 90% of what you owe for the current tax year or show that you paid everything you owed for the previous year (whichever amount is smallest).

Don’t Forget About State Taxes

When you’re running the numbers on your federal quarterly taxes, you also have to add in what you must pay to your state tax agency. The due dates for state estimated taxes are the same as the dates for federal taxes. Depending on where you live, you may be penalized for underpaying taxes or missing the due date on state income taxes.

Bottom Line

If you work at a company that takes payroll taxes and you don’t have any other major sources of income, you likely don’t need to worry about estimated taxes. If you are self-employed or have other major sources of income, though, you’ll have to estimate your own payments and make them quarterly.

Tax Tips

  • A financial advisor can help you with all sorts of tax questions. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • No matter how you pay your taxes, it can be helpful to know approximately what you’ll owe for the purchases of budgeting. Use SmartAsset’s income tax calculator to get a sense of what Uncle Sam may be taking out of your paycheck.
  • Of course, there is always a chance that you’ll actually be getting a payment back after you’ve filed your taxes. To see what you may be able to deposit in your bank account, use SmartAsset’s free tax return calculator.

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Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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