Unlike an employee, a self-employed taxpayer, sole proprietor, partner or S corporation shareholder doesn’t have taxes deducted from income. Thus, a taxpayer has two options when paying taxes: pay during the tax season or use the estimated tax method.
If she elects to pay when filing her taxes, the Internal Revenue Service (IRS) wants all the money– regardless of the amount. For example, if a self-employed person owes $2,000 in taxes, she must pay the entire amount– even when she’s not financially able.
Estimated Tax Method
Making estimated tax payments allows an individual to pay on income not subjected to withholding before it’s due. Estimated tax payments are due four times a year: April, June, September and January. She must make each payment by the 15th day of that particular month. For instance, income earned from September 1 to December 31 is due on January 15.
Risk and Reward
Paying taxes before the April due date has some major advantages. The biggest advantage involves not having to gather the lump sum of money when it comes time to pay taxes. Another advantage includes a refund a taxpayer overestimates.
However, the estimated tax method does have some risks. One example of an estimated tax method risk involves underpayment. The IRS penalizes a taxpayer who doesn’t pay enough in taxes throughout the year. Often a taxpayer can avoid the penalty depending on circumstances like paying at least 90 percent of the money owed.
When Estimating Taxes
A taxpayer should estimate taxes when she anticipates owing the IRS at least $1,000 or more in taxes. Estimating taxes involves figure out the amount owed for the year and diving it by four. To help figure out how much taxes to pay, an individual can use a previous tax return.
The IRS has two options available for anyone wanting to make estimated payments: 1040-ES voucher or the Electric Federal Tax Payment System (EFTPS).
Resources:
Internal Revenue Service: Estimated Taxes
Bankrate.com: Paying Quarterly Estimated Payments