Decoding Estimated Taxes

A Recent Chat with a Client

 "What do you mean, you will have a penalty if you don't make estimated payments? Is this a scam?"

Let's dig into a recent conversation that clears up the mystery of estimated taxes.

Alright, buckle up, because estimated taxes are like the mini payments you make to the taxman throughout the year. If you're self-employed, a freelancer, or earn income that doesn't come with taxes already taken out, estimated taxes are your way of keeping up with the IRS. Think of it as paying a little bit at a time rather than one big sum when tax season hits.

Estimated taxes are quarterly payments made to the IRS on income not subject to withholding. This includes income from self-employment, investments, rentals, and other sources.

Who Should Pay Estimated Taxes?

• Self-Employed Individuals: Freelancers, contractors, and business owners.

• Investors: Those with substantial investment income.

• Landlords: Individuals with significant rental income.

• Retirees: Those with income not subject to withholding.

• Others: Anyone with considerable non-wage income.

Payment Schedule

Estimated taxes are due quarterly:

• April 15 for income earned January 1 - March 31.

• June 15 for income earned April 1 - May 31.

• September 15 for income earned June 1 - August 31.

• January 15 (following year) for income earned September 1 - December 31.

Calculation Method

• Estimate Annual Income: Predict your gross income for the year.

• Determine Taxable Income: Deduct allowable expenses and exemptions.

• Compute Tax Liability: Apply current tax rates.

• Adjust for Withholdings and Credits: Subtract any tax already paid or credits earned.

• Divide by Four: This is your quarterly payment amount.

Payment Methods

1. Online:

   1. IRS Direct Pay: Visit IRS Direct Pay, select "Make a Payment," then choose "Estimated Tax" under the "Reason for Payment" section, and "1040ES" as the "Apply Payment To" option.

   2. Electronic Federal Tax Payment System (EFTPS): Visit EFTPS, log in, and select "Estimated Taxes" from the payment options.

   3. Credit/Debit Card: Visit IRS Payment Options and select "Pay by Card," then follow the prompts to pay your estimated taxes.

2. By Mail: Use Form 1040-ES and follow the instructions for mailing your payment.

For California state estimated tax payments:

• Online: Visit California Franchise Tax Board (FTB) Payment Options, select "Bank Account" or "Credit Card," then choose "Estimated Tax" as the payment type.

Penalties

Penalties may apply if you owe $1,000 or more after filing or if payments are less than 90% of the current year's tax or 100% of the previous year's tax, whichever is less.

Resources

• Form 1040-ES: For estimating and paying taxes.

• IRS Publication 505: Detailed guide on estimated taxes and withholding.

Please contact contact@2cherrytax.com for additional information.