Why Pay Quarterly Estimated Taxes
Quarterly estimated tax payments are essentially a way for the IRS to not have to wait for its money from people who do not work jobs where taxes are immediately deducted. Because of that, in addition to using any of the methods above, people can also meet their estimated tax obligations through one other method.
What Happens If I Pay My Quarterly Taxes Late
Quarterly taxes usually refer to one of two types of taxesestimated income taxes or payroll taxes. Both businesses, depending on their structure, and individuals make estimated income tax payments on a quarterly basis. Only businesses are subject to payroll taxes, and those can be paid monthly, quarterly or annually depending on the size of the business. Payroll tax returns are filed on a quarterly or annual basis regardless of when the payment is made.
Income Subject To Withholding
Income subject to Iowa income tax withholding includes all types of employee compensation, such as:
It does not matter if the income is based on the hour, day, week, month, year, or on a piecework or percentage plan. It also doesnt matter if the employee is paid in cash or in some other form.
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How To Pay Estimated Tax Payments Online
Filing and paying estimated tax payments by quarterly deadlines can save you from expensive penalties at year-end.
Estimated tax payments come into play for taxpayers who do not have taxes withheld from their paychecks throughout the year. Contrary to what you might have thought, the IRS considers taxes “pay as you go” throughout the year. This is accomplished through periodic withholding for taxpayers on a typical payroll, and through estimated quarterly tax payments for the self-employed who have no payroll withholding. At year-end, your tax return calculates your total tax owed for the year. Any taxes previously paid are deducted from tax owed, leaving a balance owed, or in case of overpayment, a tax refund.
How Much Estimated Tax Do You Have To Pay
Ideally, the four estimated tax payments you make each year will add up to your tax liability for the year. However, if your income varies substantially from year to year, it can be hard to estimate how much you must pay during the year.
So, itâs easy to end not paying enough estimated tax to cover all you owe. Unfortunately, if you donât pay enough estimated tax, the IRS will impose an underpayment penalty.
Fortunately, there is a way to avoid having to estimate how much youâll earn this year. No matter what your income for the current year turns out to be, you wonât have to pay any penalties if the estimated tax you pay is at least the smaller of:
- 90% of your total tax due for the current year, or
- 100% of the tax you paid the previous year or 110% if youâre a high-income taxpayer
Many self-employed people establish separate bank accounts to save up for taxes into which they deposit a portion of each payment they receive from clients. This step gives them some assurance that theyâll have enough money to pay their taxes.
The amount you should deposit depends on your federal and state income tax brackets and the number of your tax deductions. Depending on your income, youâll probably need to deposit 15% to 50% of your pay in the highest tax brackets. If you set aside too much, of course, you can always spend the money later on other things.
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How To Pay Quarterly Taxes Online Or By Mail
For business owners, taxes dont end on April 15th. Most self-employed professionals and business owners need to pay quarterly taxes. Quarterly taxes represent down payments on your annual taxes. If youre running your own business, nobody is withholding taxes from your checks. However, that doesnt mean youre off the hook from paying them.
Covering your estimated taxes is your responsibility. The IRS doesnt want to wait all year to collect, so they want you to send out schedule payments. Quarterly tax payments are due four times per tax year.
Yes, quarterly taxes apply to shared-economy gigs too. Expect to owe quarterly taxes if your year-end taxes total over $1,000. Estimated tax rules apply to all side businesses, both full and part-time.
Staying organized and keeping track of your expenses will make quarterly tax time much easier.
Payroll Taxes Are Particularly Important
Furthermore, the type of tax involved can result in different types of responses from a taxing agency. For example, the IRS takes a dim view of businesses that dont pay and/or file their quarterly payroll taxes and are far more aggressive in that regard than with the average taxpayer who forgot to make an estimated tax payment.
The reason that the IRS is more aggressive with regard to payroll taxes is because they view that money as not belonging to the business but rather as money being held the business for the IRS because it has been withheld by the business from the employees on behalf of the IRS through payroll deductions and withholdings .
In effect, businesses are the tax collectors for the IRS, and they are simply holding those funds in trust until paid to the IRS. As a side note, the worst thing a business can do is withhold these funds and then use them for cash flow because they dont always have to be remitted to the IRS right away. They should always be withheld, set aside, and used for no other purpose than to be remitted to the IRS on time as prescribed by law.
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How Can I Pay Quarterly Estimated Taxes Online
To pay quarterly estimated taxes, traditionally you would have a little paper voucher called the Form 1040-ES. You would mail that, along with a check, to the IRS.
My CPA gives me one each year so if you dont have one, you might want to ask your CPA about it.
NOTE: The envelope would need to be postmarked on or before the due date for it to count as a timely payment.
If youre scrambling to pay last minute, or dont want to use paper or snail mail, heres how you can easily pay quarterly estimated taxes online :
What Forms Do You Need To File Quarterly Taxes
If youâre an independent contractor, you should receive a Form 1099 from each business client that has paid you at least $600 during the tax year. Also known as an âInformation Returns Form,â it provides the IRS with a record of your income for the year. If youâre a freelancer, you may have multiple 1099 forms from various employers. Therefore, itâs essential to take them all into account when calculating estimated payments.
Other IRS forms may be required depending on the type of business entity youâre filing under. For example, if youâre registered as a sole proprietor, LLC, S corp shareholder, or a self-employed individual, you must use Form 1040-ES to submit quarterly estimated tax payments.
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How To Avoid Penalties
In order to avoid underpayment penalties, it is essential to be as accurate as possible when calculating your quarterly taxes. Since tax liability can sometimes be difficult to estimate, especially if your income is irregular, the IRS offers a safe harbor method. To avoid penalties of underpayment, use one of the three safe harbors:
- Calculate what you owe for this year and pay 90% of that amount in four installments.
- Pay 100% of the tax liability for the previous year
- Pay 110% if your adjusted gross income is higher than $150,000 for married couples and $75,000 for singles.
Financial Institution Excise Tax
For tax years beginning on or after January 1, 2020, the due date to file the Forms ET-1 and ET-1C has changed to correspond to the federal due dates for the income tax return. The Form ET-8 is no longer required to request an extension to file Form ET-1/ET-1C. However, if an extension has been granted for federal purposes, the extension is also granted for Alabama purposes. The federal extension form must be submitted with the Form ET-1/ET-1C. NOTE: The full amount of the tax liability is due by the ORIGINAL due date of the return.
Form FIE-V: If your payment is less than $750, you can remit your payment by check or money order. Make check or money order payable to: Alabama Department of Revenue. Include on the check: the financial institutions federal employer identification number or the Qualified Corporate Groups federal employer identification number for ET-1C filers, the form type or type of payment , and the tax year end. The check or money order must be remitted along with a complete Form FIE-V, Alabama Financial Institution Excise Tax Voucher to ensure proper posting of the payment.
Electronic Payments: For payments that are $750 or more, the payment must be made electronically. The payments can be made electronically through the following options:
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Who Pays Quarterly Estimated Taxes
The person responsible for paying quarterly estimated taxes is usually self-employed as an independent contractor or a sole proprietor of a business. It is typically that persons sole responsibility for paying taxes. Employers may withhold a percentage of the tax obligation and make estimated payments on behalf of employees, however.
What Are Estimated Taxes
Income that is not subject to federal tax withholding during the course of the year is still subject to tax, requiring you to pay estimated taxes to ensure that you pay as you go. Wage earners can get around this by increasing the amount withheld at their regular job.
Examples of income not normally subject to tax withholding include:
- Interest.
- Unemployment compensation.
- Social Security benefits in some cases.
The IRS wants Americans to pay taxes as they earn money. Normally, penalties and interest apply for underpayments and late payments.
Because of the pandemic in 2020, some tax filing deadlines were relaxed and extended. Similarly, interest and penalties were waived and didnt begin accruing until mid-July.
Keep in mind that due to COVID-19 the 1040 returns for 2019 were moved from being due on April 15 to July 15, says Judy OConnor of accounting firm OConnor & Rodriguez, PA, in Miami Shores, Florida. And then due to COVID the first two quarterly payments for estimated taxes were moved from April 15 and June 15 to July 15.
But as of now, no changes are planned for the 2021 tax year due to the pandemic, she adds. But that could change. There is so much up in the air still with COVID-19, and there could be changes once again.
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How Do I Pay Estimated Quarterly Tax Payments
Once you have calculated your payment amount, you can pay in one of several ways:
- Submit the payment online through the Electronic Federal Tax Payment System
- Direct debit from your bank account, available only when you e-file your return
- Pay with a paper check, making sure to include the payment voucher that is included with Form 1040-ES for individuals and Form 1120-W for corporations.
Although dealing with taxes four times a year in addition to filing your annual return may sound burdensome, paying estimated taxes throughout the year will actually ease your tax burden at year-end, while simultaneously ensuring that you avoid unnecessary and costly penalties.
About the Author
Naomi Levenspil
A CPA by trade, but a writer at heart, Naomi Levenspil jumps at the chance to exercise the right side of her brain. WhenRead more
A Guide To Paying Quarterly Taxes
OVERVIEW
Self-employed taxpayers likely need to pay quarterly tax payments and meet key IRS deadlines. Heres a closer look at how quarterly taxes work and what you need to know when filing your tax returns.
For information on the third coronavirus relief package, please visit our American Rescue Plan: What Does it Mean for You and a Third Stimulus Check blog post.
Working for yourself presents a host of benefits, such as never having to report to a boss and setting your own hours. It also carries a few added tax requirements, such as paying your taxes quarterly instead of with each paycheck as a W-2 employee would.
Keep reading to learn answers to questions like, “Who has to pay quarterly taxes?” “When are quarterly taxes due?” and “How do I pay quarterly taxes?”
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How To Pay Estimated Taxes
Ideally, the IRS would like to get your estimated taxes in four equal payments over the course of the year, but some businesses are seasonal. For example, a landscaping business makes most of its money during the warmer months of the year. Its wise to pay the tax as you get income. In this event, youd follow the annualized income installment method that enables you to pay when youre flush with cash. Instructions can be found in IRS Publication 505, Tax Withholding and Estimated Tax and Form 2210.
Once you determine the amount to pay, the IRS will accept your money in any number of ways. Instructions for payment options can be found at IRS.gov/payments. These include:
- Direct pay from your checking or savings account.
- The IRS2Go mobile app.
- Cash at a participating retail establishment.
If you pay online, which you can do any time of the year, be sure to select the tax year and tax type or form associated with your payment. If you pay by check or money order, send the payment along with a Form 1040-ES voucher to the address specified for your state or territory on that form. Make the check out to the United States Treasury, and in the notes section in the lower left corner, specify the tax year and estimated taxes.
What Taxes Do Self
As a self-employed individual, you file an annual return but usually pay estimated taxes every quarter. Quarterly taxes generally fall into two categories:
- The self-employment tax
- Income tax on the profits that your business made and any other income
For example, in the 2021 tax year:
- The self-employment tax rate on net income up to $142,800 for tax year 2021 is 15.3%. That breaks down to 12.4% Social Security tax and 2.9% Medicare tax. As your income increases past this amount, the 2.9% Medicare tax continues but the Social Security portion stops.
- High earners generally, individuals with incomes of $200,000 and above or married couples with incomes of $250,000 or more are subject to an additional Medicare tax of 0.9%.
To calculate your taxable income as a business owner:
- Take your expected annual gross income the total revenue you received and deduct expenses and any deductions you’re eligible for. For example, if your annual revenue came to $100,000 and you had business deductions that total $30,000, your taxable income amounts to $70,000.
- $100,000 – $30,000 = $70,000 taxable income
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General Information About Individual Income Tax Electronic Filing And Paying
Filing and paying taxes electronically is a fast growing alternative to mailing paper returns and payments. The Missouri Department of Revenue received more than 238,000 electronic payments in 2020. The Department also received more than 2.6 million electronically filed returns in 2020. Convenience, accuracy, and the ability to direct deposit your refund are just a few of the reasons why electronic filing is becoming one of the Department’s most popular filing methods.
When Are Estimated Quarterly Tax Payments Due
Estimated tax payments are due four times a year.
If you are filing as an individual, and assuming that your fiscal year aligns with the calendar year, estimated tax payments are due on the following dates:
For corporations, estimated tax payments are due as follows:
Note that these due dates do not coincide with calendar quarters, so make sure to take note and plan carefully. If a payment is due on a weekend or legal holiday, it becomes due on the next business day. You may pay at more frequent intervals, or any intervals that suit your needs, as long as the full amount due for each period is paid by the due date for that period. You may also choose to pay the full year’s estimated taxes by April 15th of the current year. And of course, if you’ve already filed your taxes and paid what you owe before the last payment is due in January, you can skip that installment.
The IRS charges penalties and interest for underpayments, late payments, and missed payments. Even if your annual tax liability turns out to be a refund, you can still incur penalties for any individual payment that was late or short paid during the year. Staying on top of the due dates is crucial to avoid these unnecessary expenses.
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Extended Due Date Of First Estimated Tax Payment
Pursuant toNotice 2020-18, the due date for your first estimated tax payment was automatically postponed from April 15, 2020, to July 15, 2020. Likewise, pursuant to , the due date for your second estimated tax payment was automatically postponed from June 15, 2020, to July 15, 2020. Please refer to Publication 505, Tax Withholding and Estimated Tax, for additional information.
