As the IRS puts it: "The United States income tax is a pay-as-you-go tax." This means as you earn income, you must pay tax on it. Unfortunately, you can't just wait until you file your income tax to pay it all at once. The government makes it pretty easy for traditionally employed workers to pay as they go by requiring that employers deduct income and payroll taxes directly from their paychecks.
Independent contractors and business owners, however, have to send in these taxes on a regular basis.
Usually they send them quarterly, but they can send them monthly.
If you don't pay in enough during the tax year, you may owe a penalty when you file your income taxes. According to the IRS, "most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year" (emphasis added).
If you're an independent contractor who pays quarterly estimated taxes, you are sending money to the federal government and possibly your state government (state laws on this may differ from federal law) at least four times a year. You may be writing checks or if you'd like to send the money electronically, you can use the governments EFTPS system to send payments.
When are Estimated Taxes Due?
The exact dates that estimated taxes vary slightly from year to year, because if the typical date falls on a Saturday or Sunday, the Federal government's deadline is moved to the following Monday.
(This isn't true for all states so check your state's deadline.) In general the deadlines are:
- April 15 (1st quarter)
- June 15 (2nd quarter)
- September 15 (3rd quarter)
- January 15 (previous year's 4th quarter)
How much should I pay in estimated taxes?
This is a complicated question because everyone's tax situation varies.
The simplest way to figure it is to take what you owed in taxes last year, divide it by four and make payments of that amount. However, if your income is likely to change between years (as is so often the case with independent contractors) you could end up over- or under-paying. Keeping a close account of your income and adjusting your tax payments accordingly can help you avoid a penalty. See this example of an independent contractor that estimates quarterly taxes.
However, tax planning is more than that; it is just as important to make a plan not only for what you must pay but for how you intend to save the money to pay those taxes without having to empty your savings accounts or, worse, incur debt. These 4 tips on saving for taxes could prevent you from owing a penalty or at least reduce your stress at tax time by eliminating unpleasant surprises.
I am not a tax attorney, CPA or tax preparation specialist. The information here is meant as a general guide. For specific questions about your own taxes, please refer to IRS publications or consult a tax specialist.