Summer is officially coming to a close in just a few weeks. However, before this occurs, there is a big IRS tax deadline worth noting for self-employed professionals and business owners. This deadline surrounds estimated tax payments.
A Brief Overview of Estimated Taxes
In basic terms, estimated taxes are levied on income from which no self-employment and Social Security and Medicare taxes are withheld. This is something employers typically withhold from their employees’ paychecks. The amount of estimated taxes that one must pay depends on the amount of income earned that is not from wages or salaries. As the name suggests, it is simply an estimation of taxes one owes, so the amount paid could be higher or lower than the “actual” amount owed. Taxpayers determine whether they’ll get a refund or whether they’ll owe more after the filings and payments for estimated taxes have been made.
Who Makes Estimated Tax Payments & When Are They Due?
Independent contractors, self-employed workers, and small business owners who operate formal LLCs, S corporations, and C corporations are required to make estimated tax payments on a quarterly basis throughout the year. If you earn a certain amount of income via capital gains, interest, rent on property, alimony, dividends, or prizes, you’ll likely have to make at least one estimated tax payment on these income-earning activities as well.
Thursday, September 15th is one of these four deadlines during 2016. The other deadlines for estimated tax payments are January 15th, April 15th, and June 15th. The upcoming September deadline is for taxes owed on income earned during the third quarter of 2016.
How To Calculate & File Your Estimated Tax Payments
In order to determine the most accurate amount for each estimated income tax payment you make to the IRS, you should estimate how much adjusted gross income and taxable income you are expecting to earn within a specific tax year. Go back and look at your previous year’s tax return to get an idea of how much you earned last year, along with any tax deductions and tax credits you claimed last year to reduce your tax liability. Then make a reasonable estimation as far as how your income and tax-saving opportunities may change in the coming year. Finally, you should be able to estimate what 25% of your total tax liability should be for a particular year, and then you can pay this amount each quarter of the year. The four payments represent your entire estimated tax payment for the year.
You must use Form 1040-ES to file and pay estimated taxes if you owe them to the IRS.