What Are Estimated Tax Payments?

If you earn or even receive any money, the IRS wants their share. If you get a regular paycheck, those taxes are conveniently deducted before you are even paid. If you are an independent contractor or earn income any other way, you need to make estimated, quarterly tax payments to the IRS.

The basic rule is if an individual "expects" to owe tax of at least $1000, they must file and make estimated payments. Also if you owe taxes one year, they may want you to make estimated payments of the same amount for the next year, as they assume you will make a similar amount. If you owed no taxes last year, you don't need to make estimated payments.

People who receive income from self-employment need to make these payments but it also includes income from interest payments, dividends from stocks or investments, alimony, rent payments, gains from the sale of assets, even prizes and awards.

There is an easy way to make the payments, get yourself IRS Form 1040 ES, and start sending in those checks. The payments are made four times a year, usually April 15, June 15, September 15 and January 15th. Be careful, the IRS will charge you a penalty and interest, if you are late on an estimated tax payment. You have to pay this even if you are eventually entitled to a refund of those estimated tax payments. These rules apply to indivudals, as well as corporations, partnerships and sole proprietorships.

To set yourself up to make these payments easily, the first step is to create a tax bank account. This is a basic checking account you will use only for taxes and nothing else. It's not a special kind of account, just open a basic checking account, where ever you already do your banking. Whenever, without exception, you receive a check or a payment, you will take 30% of the amount off and deposit that into your new tax account. The goal is, at the end of the year, to have an account with 30% of your annual income, which should cover your taxes due. No more enormous tax bill for independent contractors.

In the worst case, after you do your taxes, you will simply write a check for the amount in your tax account. You may be able to save some, but you probably won't have to pay more out of pocket. You can use the information on how accurate the money you set aside was compared to your actual taxes due. Then for next year, maybe you can hold back less or maybe you need to hold back more, depending on what your tax liability ended up to be.

If you are self-employed, the estimated payment will include the self-employment tax, which is where the 30% average comes from, the average tax rate plus the standard self employment tax rate.

As with all tax matters, I recommend you consult a tax professional before taking any actions.

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