You need to make estimated tax payments if your income tax withholding will not fully cover next year's tax liability. This applies mostly to self-employed people, landlords, and investors. You need to make estimated tax payments at least every three months. This is because your income tax withholding (from your day job) may not be sufficient to pay your federal income tax in full by the end of the year. Figuring your estimated tax payments is quick and easy using these simple steps.
Difficulty: Average
Time Required: About 1 Hour Every 3-Months
Here's How:
- Get out your most recent tax return.
- Look at two crucial lines on your tax return: your total tax and your withholding. On Form 1040, this would be lines 62 (total tax) and 63 (withholding).
- Subtract the two figures. Total tax minus withholding. The result is your unfunded tax liability.
- Divide this figure by four (if you want to make quarterly payments) or by twelve (if you want to make monthly payments).
- Make your payments at least every three months. Estimated tax payments are due by April 15th, June 15th, September 15th, and January 15th.
- If you expect your income to increase or to decrease significantly, you may want to calculate your estimated taxes using your projected total income.
- If you are self-employed, don't forget to estimate both your regular income tax and your self-employment tax. Here's how: Find your average tax rate by dividing your income tax (1040 line 43) by your adjusted gross income (1040 line 37). Now, add your average tax rate to the self-employment tax rate of 15.3%. Multiply this percentage by your quarterly net profit to figure how much estimated tax to pay.
- Mail your estimated tax payment to your IRS Service center using Form 1040-ES (PDF format). Make your check payable to "United States Treasury" and be sure to put your Social Security Number on your check.
- Better yet, make your estimated tax payments via the Electronic Federal Tax Payment System, or EFTPS. EFTPS is online bill pay for your federal taxes. What I like most about EFTPS is the ability to set up recurring monthly payments, so paying estimated taxes becomes part of the monthly budget. Also, you can print out a report of all estimated tax payments, which comes in handy at tax time.
Tips:
- Try paying your estimated taxes monthly, instead of quarterly. You'll find that the payments are smaller and more manageable.
- Try using EFTPS instead of mailing in your payments. No checks to get lost in the mail.
- Keep track of your estimated tax payments, and save this information for next year's taxes.
What You Need:
- Copy of your most recent tax return.
- Calculator.
