The Ins and Outs of Estimated Taxes

Those that are self employed may be responsible for paying taxes directly to the IRS after filing their annual tax return. Taxes must be paid as you earn or receive income throughout the year. These taxes can be paid through two ways:
1) Withholding Tax Payments or 2) Estimated Tax Payments. If you are an individual that is in business for yourself, you generally need to make estimated tax payments.

There are also instances where the income tax withheld from your salary is not enough. Income such as interest, dividends, alimony, capital gains, or prizes and awards can cause you to make estimated tax payments.

Those required to pay estimated tax include:
  • Individuals, sole proprietors, partners, and S-corporation shareholders if they expect to owe tax of $1,000 or more.
  • Corporations that expect to owe tax of $500 or more.
Those NOT required to pay estimated tax include:
  • Meeting all of the following conditions:
    • Had no tax liability for the prior year
      • This occurs when your total tax was zero or it was not required for an income tax return to be filed the previous year.
    • Was a U.S. citizen or resident for the entire year.
    • Prior tax year covered a 12-month period.  
  • Individuals that request having additional tax withheld from their earnings. The amount that you would like to have withheld should be noted on your Form W-4.
Most tax filers use Form 1040-ES to calculate the amount of estimated tax that they will owe. These individuals include sole proprietors, partners, and S corporation shareholders. In order to calculate your estimated tax you will need the following info:
  • Expected Adjusted Gross Income
  • Taxable Income
  • Taxes
  • Deductions
  • Credits for the Year
Calculation Tip: Use your prior year’s federal tax return as a guide and utilize Form 1040-ES to calculate your estimated tax. You will have to estimate your expected amount of income for the year. If your estimations are too high or too low, simply complete another Form 1040-ES with the correct information. Be sure to estimate your income accurately to avoid any penalties. Also, just so you know, corporations generally use Form 1120-W to figure its estimated tax.
Estimated taxes can be paid in four divided payment periods: Each period has a specific due date and if you don’t pay enough tax by the due date of each period, you may be charged a penalty, even if you’re eligible for a refund when you file your income tax return. These taxes can be paid in full or quarterly in a pay-as-you-go method on the following dates:
  1. First Payment – April 18, 2017
  2. Second Payment – June 15, 2017
  3. Third Payment – September 15, 2017
  4. Fourth Payment – January 16, 2018
Payments for estimated tax can be made directly to the IRS online at, by phone or by mail. Corporations must make these payments using the Electronic Federal Tax Payment System.
As one may expect, if you do not pay enough tax throughout the year you may have to pay the IRS a penalty fee for underpayment of estimated tax. Most taxpayers avoid this penalty if they owe less than $1,000 in tax after deducting any withholdings and credits or have already paid at least 90% of estimated taxes for the current year or 100% of the  tax shown on the return for the previous year–whichever is smaller.
Penalties may also be avoided or lowered by annualizing your income and making unequal payments if your income is received unevenly during the year. Other ways to have a penalty waived include:
  1. Failure to make payments due to a casualty, disaster, or other unusual circumstance. The situation must be inequitable to impose a penalty.
  2. You retired (after age 62) or became disabled during the tax year that payments were required, but the underpayment was due to reasonable cause and not willful neglect.

Be sure to take advantage of these useful tips and stay caught up throughout the year to avoid any large payments when it’s time to file your taxes. If the time comes to file and you need an extension, be sure to file one with ExpressExtension in just a few minutes!

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