taxes

The skinny on paying estimated taxes

Taxes » Income Taxes » The Skinny On Paying Estimated Taxes

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.

Most people satisfy their tax obligations through payroll withholding. But when that doesn't happen, you have to get the money to the government yourself by filing Form 1040-ES vouchers.

The U.S. tax system is on a pay-taxes-as-you-earn goal, so the Treasury's goal is to get any estimated taxes regularly, too. The Internal Revenue Service has set up a timetable, calling for estimated tax payments four times a year. Although the payments are commonly called quarterly, they don't coincide with calendar quarters.

Estimated filing schedule

Estimated tax dueFor income received
April 15Jan. 1 through March 31
June 15April 1 through May 31
Sept. 15June 1 through Aug. 31
Jan. 15Sept. 1 through Dec. 31

The four 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.

There is one such deadline change in 2014.

The June estimated tax due date is Monday, June 16 because the 15th is Sunday.

The IRS prefers you figure the total estimated tax for the entire year, divide it by four 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 or by enrolling in the tax agency's Electronic Federal Tax Payment System, or EFTPS.

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 certified public accountant and tax manager at Drolet & Associates PLLC in Washington, D.C. "The IRS wants people to be paying their taxes during the year," she says.

Alternate payment options

Eva Rosenberg, an Enrolled Agent who is authorized to represent taxpayers before the IRS and offers tax advice on the TaxMama website, offers an alternative to continual calculations, as long as you expect your taxable income to be the same or higher than it was last year.

All you need is last year's tax return and statements showing current tax withholding.

Figuring estimated payments

Look at Page 2 of your last 1040, specifically the "total tax" entry. Let's say it was$10,000
From that, deduct any withholding you expect to have from any sources (wages, unemployment). For this example, let's use$3,000
That gives you the total amount to be made up by estimated tax payments$7,000
Divide the result by 4, and that's what you'd pay the IRS each quarter in this scenario:$1,750

Rosenberg's method works even if you expect to owe substantially more in taxes this year than you did the previous one. This is because the IRS considers estimated taxpayers compliant as long as they pay either 90 percent of their eventual tax bill or a "safe harbor" payment based on a percentage of the tax owed the previous year.

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