Money Monday: What are Estimated Quarterly Taxes? Why Should I Pay Them?
Estimated taxes are an important part of life for self-employed writers.
Paid quarterly in the United States, they allow anyone who makes his or her own income to pay the IRS what they anticipate owing in advance of their annual tax return.
Paying the IRS in advance may sound unattractive to you, but not doing so can be worse. At the least, by paying an anticipated income tax, your tax burden will be lessened come April.
If you're still having trouble feeling warm fuzzies when it comes to estimated taxes, try thinking of them in the same way you once considered the FICA and Medicare taxes taken out of your paycheck in the office: as a necessary evil.
In other words, since this is income you made while being your own boss, you'll have to do the dirty work now.
So, how do you know how much you should pay in estimated quarterly taxes?
If you have a year or more of self-employed financial information to reference, this should be easy:
- Find your total gross income on last year's tax return, and determine your corresponding tax bracket. (These charts on the Tax Foundation website should help you out.)
- Calculate the resulting percentage of your income, and divide it into fourths.
For example, if you made $20,000 in self-employed writing income last year, but made $18,000 including tips at your barista gig, then you made $38,000 and owe 25% on all earned monies. This means $5,000 of your self-employed income, which you can split into $1,250 and pay in April, June, September, and January.
Don't have a full year of self-employed income data to compare yourself to? Or do you anticipate making more than you have in previous years?
In this case, plan to set aside 25% of each client payment to help pay next year's income tax. When a quarter is coming to an end, add up all of those percentages to find the amount you owe this time around.
You may end up overpaying, in which case you may get a refund, but at least you won't be hit by the sticker shock of owing money.
How to Pay Estimated Quarterly Taxes
There are two ways to pay estimated quarterly taxes: by mail or online. Either way, your payment still gets where it's going, but I think each fits one personality type over the other.
Mail a Check if You Describe Yourself as "Low-Tech"
If you don't trust technology, sending in a check is probably your best bet. Print and complete one of the four vouchers on the 1040-ES form, then mail it to your regional IRS Office along with your check.
Pay Online for Quick, Secure Peace of Mind
Of course, the snail mail method risks stolen checks, so you can only breathe a sigh of relief once the check clears in your account.
If you want a better [electronic] paper trail to prove that the feds have received your payment, register for an account on the Electronic Federal Tax Payment System (EFTPS.gov). You'll use your SSN, individually assigned PIN, and an internet password to log in and pay on the secure user interface.
Immediately after paying, you'll receive a confirmation page that can be printed for your records.
While you make self-employed money as part of your business, you should be paying estimated taxes as an individual. After all, it won't be your business filing its income tax return in the spring. So, when you're ready to pay your estimated taxes, calculate how much you owe and transfer it to your personal finance account.
This article has explored a topic specific to the American tax code. If you're an international reader with insight to contribute regarding your country's tax code, I'd love to hear from you. Please share your guidance in the comments below.
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Jessica Hatch is not a Registered Investment Advisor, Broker/Dealer, Financial Analyst, Financial Bank, Securities Broker or Financial Planner. The information in this blog post is provided for informational purposes only. It is not intended to be and does not constitute financial advice, is general in nature and not specific to you. Ms. Hatch is not responsible for any investment decisions made by you. You are responsible for your own investment research and investment decisions.