Paying Estimated Taxes Important for Self-Employed
By Christine Hall
Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends and rent, as well as gains from the sale of assets, prizes and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension or other income is not enough.
Both individuals and business owners may need to file and pay estimated taxes, which are paid quarterly. In 2018, the first estimated tax payment is due on April 17, the same day tax returns are due. If you do not pay enough by the due date of each payment period you may be charged a penalty, even if you are due a refund when you file your tax return.
If you are filing as a sole proprietor, partner, S corporation shareholder and/or a self-employed individual, you generally have to make estimated tax payments if you expect to owe taxes of $1,000 or more when you file your return.
If you are filing as a corporation, you generally have to make estimated tax payments for your corporation if you expect it to owe taxes of $500 or more when you file its return.
If you had a tax liability for the prior year, you may have to pay estimated tax for the current year; however, if you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings.
Who does not have to pay estimated tax?
You do not have to pay estimated tax for the current year if you meet all three of the following conditions:
- You had no tax liability for the prior year.
- You were a U.S. citizen or resident for the whole year.
- Your prior tax year covered a 12-month period.
If you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings. To do this, file a new Form W-4 with your employer. There is a special line on Form W-4 for you to enter the additional amount you want your employer to withhold.
You had no tax liability for the prior year if your total tax was $0 or you did not have to file an income tax return.
Estimated Tax Due Dates
For estimated tax purposes, the year is divided into four payment periods, and each period has a specific payment due date. For the 2018 tax year, these dates are April 17, June 15, Sept. 17 and Jan. 15, 2019. You do not have to pay estimated taxes in January if you file your 2018 tax return by Jan. 31, 2019, and pay the entire balance due with your return.
The easiest way for individuals and businesses to pay their estimated federal taxes is to use the electronic federal tax payment system (EFTPS). Make all of your federal tax payments, including federal tax deposits (FTDs), installment agreement and estimated tax payments, using EFTPS. If it is easier to pay your estimated taxes weekly, biweekly, monthly, etc., you can, as long as you have paid enough in by the end of the quarter. Using EFTPS, you can access a history of your payments, so you know how much and when you made your estimated tax payments.