The second quarter estimated tax payment is due in less than two weeks (June 15). Do you know if you need to make estimated tax payments?
The federal income tax system is a pay-as-you-go tax 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 taxes by making estimated tax 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 tax year, after subtracting your withholding and tax credits, AND if you expect your withholding and tax credits to be less than the smaller of:
* 90% of the tax liability on your current year tax return, or * 100% of the tax liability on your prior year’s tax return
Example: If your tax 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 tax 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 tax 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 estimated taxes by using payment vouchers (Form 1040-ES), or by using the Electronic Federal Tax Payment System (https://www.eftps.com/eftps/). 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
IRS Publication 505, Tax Withholding and Estimated Tax – http://www.irs.gov/publications/p505/index.html
Form 1040-ES – http://www.irs.gov/pub/irs-pdf/f1040es.pdf