Correctly Calculating and Paying Estimated Taxes

Posted by: Brookside Admin

For those with a regular income that isn't subject to withholding, estimated tax payments are extremely important. Whether you're self-employed, are an independant contractor or have a significant income from investments, knowing what you owe additional taxes on and knowing how much and when to pay help keep you from owing additional penalties and interest. If you fall into the category of people who pay estimated taxes throughout the year, these helpful tips are for you

  • Four deadlines

As opposed to the traditional April 15th deadline for your tax payment, the estimated deadlines are spread throughout the year so you can break up payment into installments. The four deadlines for payments are as follows: 

  1. Due April 15th for income received between January 1 and March 31. 
  2. Due June 15th for income received between April 1 and May 31. 
  3. Due September 15th for income received between June 1 and August 31. 
  4. Due Jan 15th of next year for income received between September 1 and December 31. 

These deadlines are otherwise treated the same as the tax deadline for everyone. Your mailed payment must be postmarked on or before the deadline. And when the deadline falls on a weekend or legal holiday, you have until the next business day to make a payment. 

  • Two ways to calculate

Should you significantly underpay the amount owed, you'll be subject to additional penalties and fees from the IRS. To avoid that, you can either carefully calculate how much you currently owe and estimate the amount of income you'll accrue throughout the rest of the year, or you can simply pay the full amount of tax liability you owed last year. If you go the calculation and estimation route, you don't have to get it entirely correct. The IRS only requires you to pay at least 90-percent of the current year's eventual tax bill. While paying the entire amount of your tax bill from last year could result in you overpaying this year, it also guarantees that you don't incur additional penalties. The 90-percent option can end in savings, but there's a significant amount of risk considering the number of variables involved in your income and investment. 

  • Get the right threshold 

There can be some confusion about the amount you actually owe if you opt for the 100-percent payment option. The amount on the check you wrote last year may not actually be the amount you owe this year. Remember, it's your complete tax liability, not necessarily your same tax payment. If part of your income was subject to withholding last year, your actual tax bill will be significantly higher than what you actually paid in a lump sum. If your income is above $150-thousand, you could actually owe 110-percent of last year's tax liability. Failing to make these adjustments could leave you thousands of dollars short in the eyes of the IRS. 

  • Annualized estimated payments

A common problem for contractors is that income won't be evenly spread throughout the year. You may make the bulk of the year's income in a single quarter and make little to nothing in another quarter. If you're using the traditional method of estimated tax payments, you'd owe an equal quarter of your annual tax liability at each deadline. With annualized estimated payments, you're able to you'll only calculate tax payments based on the actual income made that quarter. That means if you made no money, you can skip a payment entirely. This way, you're never left with a big tax bill in a quarter when you don't have enough money coming in to pay. At the end of the year, you're still required to have paid at least 90-percent of your liability. 

Regardless of your situation, the CPAs at Brown Kinion and Company are experienced to help you correctly navigate it. Call us for help planning for and preparing your taxes to ensure no additional penalties are owed and your refund is as big as possible.