If you have income from sources other than a “traditional” job, chances are that you need to make quarterly estimated tax payments. Estimated quarterly Federal tax payments for 2013 are April 15th, June 17th, September 16th, and Jan 15 of 2014). If you are a regular W-2 employee, then your taxes are automatically taken out of your paycheck. However, if you make money in another way – even if it’s “only” on the side – you might need to pay quarterly estimated taxes.
You might need to make estimated tax payments if any of the following apply (realize for farmers and fisherman the rules are generally different):
- You have your own business: When you have your own business, normally you make estimated payments. Even if it is a side business or a full-time gig, you will most likely need to pay estimated payments.
- You receive investment income: In some cases, your income investments might mean that you need to pay quarterly estimated taxes. If you receive significant dividend payments, or if you sell an investment and see a sizable capital gain, paying estimated taxes is usually a good idea.
- You are a landlord: Your rental income usually qualifies you to pay quarterly taxes.
There are other situations that might warrant paying quarterly taxes. If you do have a regular job, you can reduce the need to pay quarterly taxes by increasing the withholding from your paycheck. Many find that this can be a way to keep things simple – as long as the amounts owed are relatively small. The reason why you make estimated payments is so you can avoid underpayment penalties.
Paying Quarterly Estimated Taxes and Avoiding Penalties
Making your quarterly estimated payments is important since the IRS will assess tax penalties if you owe a lot in taxes. Many people think that by keeping the money in an interest-bearing account all year they can gain an advantage and then make a big payment at tax time. The IRS frowns upon this practice, and when your tax bill is too big you are fined.
Paying quarterly estimated taxes can help you avoid this fine. If you want to avoid the penalty, the IRS requires that you pay in at least 90% of what you owe for the current tax year, or that you pay 100% of the amount shown on your previous year’s return (110% if your AGI is $150k or more). As long as you at least the smaller of those requirements, you won’t be penalized – even if you have a large tax bill.
If you use the 90% method, you will need to project your income and deductions for the coming year. You can do this by figuring your year-to-date income and expenses and multiplying it out. You can do this by a monthly average (multiplying by 12) or a quarterly average (multiplying by four). Once you have an income total, you will need to look at a tax table that provides information about the current year’s brackets. This will give you your tax liability. You can then choose to take 90% of that number and divided it by four, or by dividing your entire liability by four and using that for quarterly payment.
An easier method, of course, is to divide your entire tax liability from the previous year by four and then pay that amount each quarter. To break it down further and make it easier, you can divide by 12 and pay into a savings account each month. Then, each time quarterly tax payments are due (April 15, 2013, June 17, 2013, September 16, 2013, January 15 of 2014), you can make a payment from the appropriate account.
Plan ahead for quarterly taxes, and remember to include them in your budget. Otherwise, you could be in for a nasty surprise.