If you use tax prep software or have an accountant do your taxes, your return from the prior year may come with estimated tax payment slips that tell you what you should pay. If you do need to pay quarterly taxes, it’s important to pay on time to avoid late payment penalties and interest. The first step in paying your estimated taxes is figuring out whether you need to file quarterly in the first place. At the start of the tax year, Bench provides small businesses with quarterly tax vouchers for the upcoming year, so you’re never left guessing how much you’ll owe.
Otherwise, you risk being hit with a large tax bill all at once, after you file your tax return. Most people could not afford paying an entire year’s tax liability all at once, and being forced to do so could even push them into debt or bankruptcy. To avoid this, the government requires all self-employed people to estimate and remit their tax payments throughout the year. Thankfully, the government provides resources and guidelines to walk you through the process. If you filed your previous year’s taxes with the help of a CPA, they should also be able to send you estimates for this year’s payments.
FAQs about estimated taxes
Our partners cannot pay us to guarantee favorable reviews of their products or services. You can reduce the net amount of qualified items of income, gains, deductions, and losses tied to your trade or business. This means items like capital gains and losses, dividends, interest income, and other nonbusiness gains and losses don’t figure into this calculation.
- But if you have no idea how much you’ll earn next year, you can pay 100 percent of your 2020 tax bill to protect yourself from owing penalties and interest.
- Even if your income grew this year, you will avoid penalties if you match the payments that you owed in the previous year (but you will still have to make up the additional tax payments).
- We are an independent, advertising-supported comparison service.
- A penalty may also apply for late estimated tax payments even if someone is due a refund when they file their tax return.
- For corporations, payments must be filed through the Electronic Federal Tax Payment System.
- Other options include withholding more from another income source or allocating part of your refund to estimated taxes.
Paying 100% of the taxes you owed on last year’s federal tax return is sometimes referred to as the safe harbor rule. Even if your income grew this year, you will avoid penalties if you match the payments that you owed in the previous year (but you will still have to make up the additional tax payments). Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. If you are in business for yourself, you generally need to make estimated tax payments. Estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax.
How to pay estimated taxes
Either way, you’ll use IRS Form 1040-ES to show your income estimate and project your tax liability. IRS Publication 505 has all the rules and details, and good tax software will help you fill out the form and do the math. Working for yourself estimated tax presents a host of benefits, such as never having to report to a boss and setting your own hours. It also carries a few added tax requirements, such as paying your taxes quarterly instead of with each paycheck as a W-2 employee would.
