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If you have income that isn't subject to withholding taxes, then you probably should be paying estimated taxes.
It doesn't matter whether the untaxed money comes from a job, investments, alimony or prizes you've won. If Uncle Sam doesn't get his share close to the time you received the money, you could end up owing not only taxes but also penalties and interest.
Unlike payroll withholding, through which most of us meet our tax obligations, estimated taxes are the responsibility solely of the person receiving the untaxed money. Form 1040-ES helps you calculate your estimated taxes and provides vouchers to send along with your estimated tax amounts if you opt to pay by check.
The U.S. tax system works on a pay-taxes-as-you-earn basis, so the Treasury's goal is to get any estimated taxes regularly, too. The IRS has set up a timetable calling for estimated tax payments 4 times a year. Although the payments are commonly called quarterly, they don't coincide with calendar quarters.
Estimated filing schedule
|April 15||Jan. 1 through March 31|
|June 15||April 1 through May 31|
|Sept. 15||June 1 through Aug. 31|
|Jan. 15||Sept. 1 through Dec. 31|
The 4 estimated tax payments are generally due each year on the 15th of April, June, September and January. But if that date falls on a weekend or federal holiday, the 1040-ES filing deadline is pushed to the following business day.
The IRS prefers you figure the total estimated tax for the entire year, divide it by 4 and send in equal payments according to the schedule. There's a work sheet with the Form 1040-ES package or as part of your tax software to do it.
You can send a paper check along with the Form 1040-ES voucher. Alternatively, you can file electronically with a credit card by enrolling in the tax agency's Electronic Federal Tax Payment System, or EFTPS, or by using the IRS' Direct Pay option.
However, many times, folks who receive a financial windfall 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 tend to put off filing estimated taxes because they need the cash and figure they'll settle things with the IRS at the annual April filing deadline.
But ignoring your estimated tax duties is not wise. If you end up owing $1,000 or more in April, you might have underpaid your tax bill. And that could result in you owing added penalties and interest, says Linda Durand, a retired certified public accountant who previously worked at Councilor, Buchanan & Mitchell, PC in Washington, D.C. "The IRS wants people to be paying their taxes during the year," she says.