Estimated Taxes

 

The Internal Revenue Service considers income tax as a pay as you go tax. You owe tax on the money you made this month, this month. That is why your employer takes money out of each paycheck to pay for your taxes. At the end of the year it is necessary to reconcile the taxes you actually owe with what you have already paid through withholding using the 1040 tax form. Some people have a balance due if they have not had enough money withheld and some people receive a refund, if they have overpaid their taxes.

 

If you are self-employed, there is no withholding so it is necessary to pay quarterly estimates. In actuality, tax withheld from your paycheck is an estimate as well. The withholding amount can be adjusted to assure that you are paying close to the actual amount due. Estimates are usually based on the previous year’s income, but not necessarily, because each person or company's situation is different.

 

Quarterly estimates are due April 15, June 15, September 15, and January 15 and should each represent one fourth of the total tax you think you will owe, including SE tax. There are special rules for farmers whose income is more likely to come in less consistently than say a barber shop.

 

Federal estimates are paid using Form 1040 ES. Each state also has their own system for filing estimated tax payments as well. If you wait until the end of the year to pay all of your taxes, the IRS will consider them late and charge you a small interest penalty even if paid by April 15.