School's back in session, but kids aren't the only ones with math homework.
If you must make estimated tax payments, you've got some figuring to turn over to the Internal Revenue Service in just a few days. So pull out your tax paperwork, fire up that calculator and get your next 1040-ES voucher on its way to Uncle Sam by the Sept. 15 deadline.
These extra tax filings are due the 15th (unless it's a weekend or holiday) of each January, April, June and September. The September one is for money you earned, but didn't have income tax withheld from, in June, July and August.
Estimated tax payments are the bane of an increasing number of Americans. They are expected from people who make money on investments, run their own businesses or get any extra cash that has not yet been taxed.
Time-consuming? Yes, nobody really likes doing taxes more than once a year.
Confusing? Sometimes, especially if you're earning income from several different sources at different times.
Necessary? You bet, or you could end up owing Uncle Sam penalties and interest.
The reason behind estimated taxes
Most people meet their tax obligations through paycheck withholding.If you're self-employed, either as your main job or as a sideline, you must get the taxes on this money to the IRS yourself by filing Form 1040-ES. Estimated taxes also are due on interest and dividends, profits from investment sales, alimony, rental income and prizes or awards.
The estimated tax system was designed to ensure that taxpayers who have a lot of nonwithholding income pay into the tax system regularly. This evens things out between these taxpayers and wage earners who lose a chunk of money each paycheck to taxes.
The problem, says Linda Durand, a certified public accountant with Drolet & Associates PLLC in Washington, D.C., is too many folks who have a windfall get excited about the extra cash and immediately spend the proceeds without any thought to the tax implications. Even people who earn a steady stream of money that isn't taxed upfront put off filing estimated taxes because they want or need the cash now. They figure they'll make it right with Uncle Sam come April 15.
That's not a good idea. If you end up owing $1,000 or more in April, you might have underpaid your tax bill. That would open the door for the IRS to add penalties and interest for not paying tax on your earnings as you got them.
Instead, Durand recommends setting aside a portion of the new cash for the taxes. And get ready to send it in before the spring tax deadline, she says, because "the IRS wants people to be paying their taxes during the year."