Understanding Estimated Tax Payments

If you’re a small business owner, freelancer, or self-employed, you’ve probably heard of estimated tax payments. But what are they, and who are they for?

What are estimated tax payments?

At KGCPA, we refer to these as “estimates.”

Estimates are quarterly payments made to cover income not subject to withholding, like self-employment earnings, rental income, dividends, and interest. Unlike W-2 employees, you’re in charge of making sure your taxes are paid throughout the year.

Who should pay estimates?

You should be making quarterly estimate payments if you expect to owe $1,000 or more. This usually applies to:

• Freelancers and small business owners with variable income.

• Investors making money from dividends or capital gains.

• Anyone with rental property income.

The IRS provides form 1040-ES to help estimate your quarterly payments. Generally, you can pay 90% of your current tax or 100% of your previous tax bill.

When and how do you pay estimates?

Estimates can be paid online, by mailed check, or through EFTPS. These payments are due four times per year:

• April 15

• June 15

• September 15

• January 15 (of the following year)

*Be sure to keep records of all estimate payments to report on your next tax return to avoid underpayment penalties!

What if you don’t make your estimated payments?

If you skip estimated payments, the IRS may charge penalties and interest. The longer you wait to pay, the more it’ll cost you. If you miss a deadline, try to pay as soon as possible to reduce the damage.

The Bottom Line

Estimated tax payments can feel like a hassle, but staying on top of them makes life so much easier come tax time. A little planning and organization go a long way in keeping your business finances running smoothly.

Want to stay on track all year long? Grab our free Bookkeeping Checklist and take control of your business’s financial health now!