There are four categories of people who should be paying estimated payments:
- People who are self-employed
- People whose nonwage income is increasing (or expected to increase) in the current year
- People who have done well on the stock market
- People who have gotten a healthy inheritance (or other windfall), with assets that produce income
Anyone else? For business owners receiving wages, if you expect to owe extra taxes, simply have your tax professional manipulate your payroll tax withholding before year-end. That way, you never have to make estimated payments.
When Should You Be Making Those Payments?
Quarterly means every three months, right? Not when it comes to estimated payments. We’re dealing with the tax code here. Some extremely clever lawmakers decided that quarterly, for tax purposes, breaks down differently.
Sometimes you’ve got to pay within two months; other times, the quarter is four months long.
How Much Must You Pay?
Before we get into any payment specifics, let’s start with some fundamental tips about making estimated tax payments. Keep handy the link to the online version of IRS Publication 505, which is about withholding and estimated tax payments. Changes in the rules will appear there.
You will be using Form 1040-ES (and your state’s equivalent). For the current year, look up the instructions to Form 1040-ES – http://www.irs.ustreas.gov/pub/irs-pdf/f1040es.pdf.
Typically, you must only pay estimates if
1. You expect to owe $1,000 or more beyond any payroll withholding
2. Your withholding or other tax credits (education, children, and so on) will be less than 90 percent of the tax you expect to owe on your current year tax return. (If your income falls into the “wealthy” or “high-income” levels for the year, you must pay 100 percent of what you expect to owe.)
3. Your withholding or other tax credits (education, children, etc.) will be less than 100 percent of the tax return shown on your prior year’s tax return. If you expect to have losses from the business, don’t worry about making estimated tax payments on the business.
Wise heads feel that it is best to pay the minimum required taxes in advance. You can put your money to better uses than the IRS can.
Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered. Eva is the author of several books and ebooks, including the new edition of Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.