Several years ago, we had a client who wanted us to help her understand how to pay her quarterly taxes. She’d recently transitioned from working full-time, in an office, to working 1099 remote. Although she loved the freedom that came with setting her own work pace (and hours), what she didn’t love, was the massive tax bill she got at the end of the year.
“I knew I was going to owe money to the IRS, but I was not prepared to write an $8,000 check,” she said. “When I worked for someone else, my taxes were taken out of my paycheck. When I started working for myself, it didn’t occur to me that I should be making quarterly or estimated tax payments.
According to the IRS website, “individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.”
It’s also worth noting that if your estimate tax payments are late you may be charged a penalty, even if you’re owed a refund when you file your tax return.
Determining what your estimated tax payment should be can be a bit tricky. For example, in addition to needing to estimate your adjusted gross income (AGI), you’ll also need to understand what your deductions will be, what your taxable income will be, and whether you’ll receive any tax credits that year.
When it’s time to pay your estimated taxes, you have a few ways you can do it. For example, you can mail a check (and a form 1040-ES) to the IRS, you can pay via the IRS2Go mobile app, or you can pay online. The IRS also states if it’s easier for you to pay estimated taxes weekly, bi-weekly, or monthly, that’s also an option.
In closing
If you’re about to start a business (or begin working as an independent contractor), you’ll want to speak with a licensed CPA about how to figure out (and set up) your estimated quarterly tax payments. Not only will paying on time help you avoid interest and penalties, it can help prevent you from getting a massive tax bill at the end of the year.
For more information on how estimated tax payments work, how much you should expect to set aside, and whether you might still be entitled to a refund at the end of the year, call our office today to get started.
