For the self-employed or anyone who doesn’t have taxes automatically withheld from their paychecks it usually means paying estimated quarterly taxes. When you have taxes withheld the IRS is happy because they get part of your taxes due in regular installments. When you don’t have taxes withheld they still want their money and don’t want you to hold out until April before cutting them one big check. While making a estimated tax payments aren’t much fun, it’s actually a pretty good idea since it spreads your liability out over the entire year. So rather than coming up with, say, $5,000 at the end of the year, you can make more manageable payments every three or four months for just $1,250.
You’ve determined that you need to make estimated tax payments, so what’s next? You have two options when it comes to making those quarterly estimated tax payments. If you like the tried and true method of printing out forms and sending a check in the mail, you’re going to want to refer to IRS Form 1040-ES. Even if you aren’t going to mail in payments, you’ll still want to print out a copy of this useful form. It has a lot of information on how to determine whether or not you owe estimated taxes, has a worksheet to help you calculate how much your payments should be, and the dates the payments are due.
If you are going the mail and paper check route be sure to look carefully at the form to determine the correct mailing address for your payment. The payment location varies based on your location, so to make sure your payment gets credited properly and on time you want to make sure it goes to the right place. You’ll also want to make sure your tax payment is postmarked on or before the deadline dates, which are:
- 1st payment: April 15
- 2nd payment: June 15
- 3rd payment: September 15
- 4th payment: January 15
If you’ll notice, the payments don’t follow the typical calendar year quarter schedule. You only have two months between the first and second payment and four months between the third and fourth payment. This can trip new estimated tax filers up, so mark these dates on your calendar.
Finally, if printing out payment vouchers and mailing a check isn’t your thing, you’re in luck. You can make electronic payments via the Electronic Federal Tax Payment System, or EFTPS. You’ll need to create an account and wait to receive a PIN in the mail before you can make payments with this system, but it makes those payments even easier. You can link right up to an existing bank account and have the funds transferred electronically. Even better, you can schedule all of your payments in advance so you don’t have to worry about missing a payment.
Keep in mind that this only applies to your federal taxes. You’ll also need to check with your state to see how they accept payment, and in most cases they also have the same payment deadlines and will impose penalties for late payments.
Increase Withholding to Avoid Estimated Tax Payments
If you’re on the hook for making estimated tax payments but also have income that has tax withheld, you’re in luck. As long as you earn enough with your regular job, you can increase your tax withholding instead of making extra quarterly payments. As an added bonus your withholding is counted as if it was made equally throughout the year even if it wasn’t. This can help you avoid penalties on underpayment of estimated taxes.
To increase the amount of withholding from your paycheck you’ll need to fill out a new IRS Form W-4 and a state W-4 if you wish to change state tax withholding as well. You can print on off or check with your human resources department to file the change. There are two ways to change withholding on a W-4 form. The first is to reduce the number of allowances you claim on the form. The fewer the allowances, the more tax is withheld. The problem is you don’t know exactly how much more will be withheld.
The second way to change your withholding is to simply request an additional amount on the form. So, if you’ve calculated that you will need to pay $2,000 in estimated tax throughout the year and you have 13 paychecks left in the year, you can divide $2,000 by 13 to get $154 that you can then write in the additional amount box. This will make sure enough is withheld by the end of the year to meet your estimated tax payment amount. Just remember that you’ll want to adjust this again in January if you made a change to your withholding at some other point in the year.
Obviously, this method only works for those who have a source of income that has tax withheld, so those of you who are entirely self-employed or receive income that doesn’t have tax withheld you’ll need to revert to the traditional quarterly payment schedule.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.