Self-Employed? Here’s What You Need to Know about Estimated Payments
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When you run your own shop or are self-employed, there’s so much paperwork you barely have time to run the business! Unfortunately, estimated tax payments (ES payments) are one more administrative burden and financial responsibility for you to shoulder.
Here are some questions my clients frequently ask me about making estimated tax payments.
Who must make estimated tax payments?
If you’re self-employed and making a profit, you must set aside approximately a third of your profits to put toward IRS and self-employment taxes. Plus, if you live in one of the states with an income tax (find out if you live in a state without a state income tax), set aside an additional 5 to10 percent to cover state taxes.
Wow! That hurts. You’re going to have to pay it sooner or later; you may as well build the taxes into your routine budget.
When are estimated tax payments due?
Estimated tax payments are due quarterly. That doesn’t mean every three months. The IRS lives on a different schedule from the rest of humanity. Your estimated tax payments must be postmarked by:
When the 15th lands on a weekend or holiday, the payments are due on the next business day.
How can I pay my estimated taxes?
There are three ways to make estimated tax payments:
Can I avoid estimated tax payments?
You betcha! Here are three easy ways to avoid estimated tax payments but still cover your taxes owed to the IRS:
You’ll find more details in chapter 2 of IRS Publication 505.
What if I don’t make estimated tax payments but pay my taxes by April 15?
The IRS charges an underpayment penalty of approximately 4 percent per year. That’s less than credit card interest. Even if you draw money for the payments from a zero percent credit card, there’s a 3 percent cash advance fee. This is actually pretty cheap money.
But if you can’t cover the taxes by April 15, the stakes go up. So don’t gamble.
Have you run into any roadblocks with estimated tax payments?
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 Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com.
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