Making Quarterly Tax Payments

Who is Subject to Paying Quarterly?

Everyone, in essence. Individuals whose tax obligation for any year exceeds $1000 need to make payments on those taxes due throughout the year. Most of us do without realizing it. If you are an employee at a regular job, most likely, those taxes are withheld from your paycheck by your employer. If, however, you are an independent contractor, own your own business, or make other money on the side, you are responsible for making those payments.

When and What to Pay

Four times per year, you must pay estimated taxes on your income and self-employment tax using Form 1040ES. Due dates for these payments are: April 15, June 15, September 15, and January 15. You are supposed to estimate the amount of income you will earn and subsequent taxes you will owe for the entire year. Self-employment tax must be taken into consideration when figuring estimated payments. You need to then pay 25% of this amount each quarter.

Tax software generally figures your estimated taxes based on what you did in previous years. It can also prepare estimated forms for you.

If you are not liable for paying estimated taxes prior to a given due date, but become liable before the next due date, file for the quarter you become liable, but increase your percentage paid.

Example:

Dan has a regular job through which taxes are withheld from each paycheck. He begins selling online. During the first part of the year, he is having enough taxes already withheld to cover his online income, as well as his regular income.

In July, however, his online sales spike significantly. He realizes the amount withheld from his regular paycheck will no longer cover his total tax liability. He may file a Form 1040ES by September 15, paying enough to equal a total of 75% (when combined with his regular withholdings) of his estimated tax due without realizing penalties (75% because it is the third quarter).

Dan may also be able to increase the amount he has withheld from his regular paycheck, instead of having to file estimated payments.

If you (and/or your spouse if married filing jointly) has income tax withheld from a paycheck, no estimated taxes are due if the withheld taxes cover more than 90% of the total tax bill for that year - or - if the tax withheld totals more than your entire tax bill from the previous year.

This means if you (or your spouse if married filing jointly) is an employee at another job besides the business, just make sure to have enough tax withheld from each check to cover taxes due from your business income, too. If so, you can forget about making estimated, quarterly payments. In essence, that withholding is paying your quarterly business payments, as well as the taxes due on the other earned income.

IRS Publication 919 will help you compare the total tax to be withheld during the year with the tax you can expect to figure on your return. It will also help you determine how much additional withholding you may need each payday from your regular job in order to avoid owing taxes and penalties for not filing quarterly. To add to the amount withheld from your regular job, you will need to fill out a new W-4 for your employer.

Form 1040ES

Form 1040ES is a simple payment voucher where you list your names, social security numbers, and address. The only other space on the form is to write in the amount you are paying. Do not forget to include a check. There is a worksheet to help you figure your estimated tax in the instruction booklet for 1040ES.

If you earn under $150,000, quarterly payments must equal 90% of your final income tax bill or at least 100% of the tax bill from last year (amount due before deducting what had already been paid - line 63 of 1040).

If you earn over $150,000, you must pay at least 110% of the tax bill from last year, spread out quarterly, or risk and under-payment penalty.

Overpayment

If you over pay your estimated taxes and expect a refund, you may elect to apply it to the estimated payments for next year.

Underpayment

You could receive a tax penalty if you under pay or miss a deadline. If you are late, you could also end up paying interest on what you owe. Your state may require quarterly payments, as well.

How To Reduce Paper Usage

Keep all documents and tax forms in a designated file, drawer, or even box. As long as they are safe, and you know where they are, you can avoid requesting a duplicate copy.

E-file state and federal income returns.

Almost all levels of the government make it easy for you to e-file you income taxes. Many taxpayers with simple returns can even e-file them free.

E-file all quarterly tax payments.

This only applies to business owners and self-employed taxpayers, but is important to remember throughout the year. You can also prepay a tax payment and then not have to worry about the future tax returns at all.

Save copies of online purchases on thumb drives instead of printing them out. You will only need a printed version if you are audited. Otherwise you can just store the data electronically.

Use software or electronic payments for payroll taxes.

If you have to make payroll payments you should always make these payments over the telephone or online.

Use a virtual fax instead of a fax machine.

Most faxes these days are merely records of a transaction anyway. Moreover, if you do need to sign and return something, you can just print the fax out.

If you intend to buy a new car, consider making the purchase online.

In addition, you can electronically file all related vehicle taxes and registrations.

Use both sides of the page.

When you are printing long documents, always remember to print on both sides of each piece of paper. If everyone followed this rule, we could literally cut paper usage by half.

Always use the print preview.

So much paper is wasted on printer errors that could have been caught by simply taking two seconds to check the preview.