Do You Need to Make Estimated Tax Payments
Do You Need to Make Estimated Tax Payments
The federal income tax system is a pay-as-you-go system. That means you pay taxes as you earn income throughout the year. If you are an employee of a company, you pay taxes through withholding from your paycheck. If you are self employed, you pay them by making estimated payments.
The general rule is that you must make estimated tax payments if you expect to owe at least $1,000 in tax for the current year, after subtracting your withholding and tax credits, AND if you expect your withholding and credits to be less than the smaller of:
* 90% of the tax liability on your current year return, or
* 100% of the tax liability on your prior year's return
Example: If your liability for 2006 was $1,500, but you expect to owe $2,000 this year because your business did better than the previous year, then the minimum you would need to pay in to avoid underpayment penalties is the lesser of $1,800 (90% of your current year tax liability) or $1,500 (100% of last year's tax liability).
The easiest way to estimate your quarterly estimated tax payments is to estimate your liability for the entire year and divide that amount by four. However, if you don't receive your income evenly throughout the year, you may use the annualized income installment method. A worksheet and instructions are available in IRS Publication 505, Tax Withholding and Estimated Tax.
The due dates for estimated payments are:
For the period: Jan 1 - March 31
Due date: April 15
For the period: April 1 - May 31
Due date: June 15
For the period: June 1 - August 31
Due date: September 15
For the period: September 1 - December 31
Due date: January 15 the next year
If the 15th falls on a holiday or weekend day, the due date will be the next business day.
You can pay your estimates by using payment vouchers (Form 1040-ES), or by using the Electronic Federal Tax Payment System. In addition, if you have an overpayment from a previous year, you can apply the overpayment to your next year's estimated tax.
Resources: IRS website - http://www.irs.gov/index.html
As a home based or small business owner, you know how quickly self employment taxes can add up. It's important to understand what expenses you can deduct from your business income so that you don't overpay Uncle Sam. For a list of tax deductions for online business owners, please visit:http://www.squidoo.com/reporting-1099-income#module13552480
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