Understanding Estimated Taxes

When you work for yourself you generally have your employer withhold federal and state (if applicable) income taxes from your wages.  Then at the end of the year it becomes a calculation of if you had enough withheld (i.e. you get a refund) or have to make a balance due payment.

But what if you work for yourself (i.e. self employed) and no one is “withholding” anything from your check?  Then this post will clue you in on how you make your payments and keep Uncle Sam happy.

What is estimated tax?
Estimated tax is how you pay your taxes when you have income that isn’t subject to withholding.  Just think of it as what your employer does for you when you don’t have an employer ( so to speak).

Who has to pay it?
If you are filing as a sole proprietor (Schedule C), or receive income as a partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments.  Fortunately, you only have to make payments if you expect to owe tax of $1,000 or more when you file your return.

If you own a  corporation, be advised that  you generally have to make estimated tax payments if you expect it to owe tax of $500 or more when you file its return.

When are payments due?
For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return.

For the period:              Due date:

Jan. 11 – March 31           April 15
April 1 – May 31                June 15
June 1 – August 31          September 15
Sept. 1 – Dec. 31