Tax day is creeping up on us again. Most people are in the middle of filing their 2009 tax returns, however, if you have self employment income you'll also be needing to send in your taxes for your 1st quarter estimated tax payment.
Thankfully I just completed my 2009 taxes earlier this week, and made my 1st quarter estimated tax payment yesterday. There's a lot to remember come tax time, so here's a quick review of the details surrounding your estimated tax payments.
Do I Need To Make Estimated Tax Payments?
Our government has instituted a pay as you go system where-by you have to pay your taxes throughout the year – you can't pay them in one lump sum at the end of the year. If you have an employer they will normally withhold taxes from your regular paycheck in order to cover your taxes.
If you have freelance income or a side business, however, you may have to make estimated tax payments.
To avoid penalties at tax time you will need to make sure that you make your estimated tax payments, and at the very least meet one of the following safe harbor requirements. You can meet the requirements through increased tax withholding at your job, estimated tax payments, or a combination of both. Different rules may apply for some taxpayers.
Meet These Safe Harbor Requirements To Avoid Tax Penalties
If you want to make sure you don't have penalties added to your tax bill, make sure that you meet one of these requirements during the year.
- Owe less than $1,000 for this year’s taxes.
- Withhold 100% of last year’s tax liability. (We paid 100% of last year's tax liability, but we ended up having to pay another $4000 at tax time since we made more this year)
- Withhold 90% of this year’s tax liability. (Do you know what it’s going to be? We had no idea what to expect, so we withheld 100% of the previous tax year's liability)
To calculate your estimated tax payments should be, download government tax form 1040-ES. If your income is variable, it may be a bit of a guessing game – but then again, that is why they have the safe harbor requirements – so you can avoid penalties if you’re off.
When Should I Be Making Payments?
If you’re going to have to make estimated tax payments this year, there are 4 payments that you’ll need to make, one each quarter. They are:
- April 15 (I just made this one)
- June 15
- September 15
- January 15
One thing a lot of people forget is that estimated tax payments are not made every 3 months, but are spaced unevenly throughout the year. That means sometimes payments are two months apart, sometimes 4 months. It varies. Mark it on your calendar so you don't forget!
When I filed taxes with Turbo Tax this year the software actually printed out 4 estimated tax vouchers with the amounts I'll need to pay for next year to meet the safe harbor requirement. Very handy to have those.
How Do I Pay My Estimated Taxes?
You can pay your estimated taxes by mail (find where to send your payment here), or online by registering for the Electronic Federal Tax Payment System. If you plan on paying online, register in advance because it will take you a while to receive your PIN via mail.
I sent my first couple of estimated tax payments in via mail, but now make my payments online. Much easier and more immediate.
Don’t Forget State Estimated Tax Payments
When you pay your estimated taxes for self-employment income, remember that you're paying for more than just your federal taxes. You’re also paying state and self employment taxes:
- Federal estimated taxes
- State estimated taxes (not all states have income tax. Unfortunately mine does.)
- Self-employment tax of 15.3% (the social security and medicare portion of your tax)
Even if you meet your safe harbor requirement as noted above, if you don't calculate correctly you can underestimate how much money you’ll need to pay your tax bill at the end of the year. Plan ahead and set the money aside in a high yield savings account like the ones from ING Direct, Everbank or Ally Bank. That's what I did this year, and even though I hated cutting those big checks, I had the money available and ready to send in.
Do you pay estimated taxes on your freelance income? Have you ever missed sending in an estimated tax payment? Tell us your thoughts in the comments!
When you're doing your taxes, take a break and head on over to Money Crashers for your chance to win one of 3 Ipads on tax day!