Most people are employees and their employer withholds taxes every paycheck to pay the Federal and State governments. At the end of the year you file your taxes and receive your tax refund. Happy, happy- joy, joy! You are one of the lucky ones.
However, things don’t quite work out this way if you are self-employed and required to file a Schedule C. If you were one of the unlucky people that owed this year you may need to consider paying estimated taxes. Filing estimated taxes is simply a method for you to pay your taxes throughout the year on income that is not subject to withholding. That includes not only income from self-employment, but interest and dividends, prizes or awards, alimony, rent, and gains from sales of assets.
Taxpayers who expect to owe $1,000 or more after subtracting tax withholding and credits may have to pay estimated taxes. In addition, taxpayers who expect withholding and credits to be less than the smaller of (a) 90 percent of their 2011 tax return or (b) 100 percent of the tax on their 2010 return may need to pay estimated taxes.
Federal estimated payments are generally due on April 15, June 15, Sept. 15 and Jan. 15. State estimated payments generally fall on the same dates as well. If you pay State estimated payments and you are itemizing, you should make your Jan. 15th payment by Dec. 31st so you can claim all 4 payments on your current year’s tax return. If you wait until Jan. to make the payment you can only claim 3 of your 4 payments on your current years itemized deductions. The 4th payment will have to be claimed on your following year’s tax return.
Paying estimated taxes can be considered a drag but they will save you tax dollars in the future. If you don’t pay your share of taxes on time or not at all you could end up owing the IRS an underpayment penalty in addition to the taxes that you owe. The penalty will be based on the how much and how long you have owed the tax to the IRS. Keep your estimated taxes paid on time to save yourself money in the long run!