If you are an employee, your employer takes care of withholding taxes from your paychecks and send that money to the IRS for you, but if you are self employed you may need to pay estimated taxes each quarter.
It depends on your situation, but here are some questions you will need to ask yourself:
- Do you expect to owe less than $1,000 in taxes for the tax year after subtracting your federal income tax withholding from the total amount of tax you expect to owe this year? If so, you’re safe—you don’t need to make estimated tax payments.
- Do you expect your federal income tax withholding (plus any estimated taxes paid on time) to amount to at least 90 percent of the tax that you will owe for this tax year? If so, then you’re in the clear, and you don’t need to make estimated tax payments.
- Do you expect that your income tax withholding will be at least 100 percent of the tax on your previous year’s return? Or, if your adjusted gross income (Form 1040, line 37) on your tax return was over $150,000 ($75,000 if you’re married and file separately), do you expect that your income tax withholding will be at least 110 percent of the tax you owed in tax for the previous year? If so, then you’re not required to make estimated tax payments.
If you answered “no” to all of those questions then you must make estimated tax payments!
So how do you figure out what to pay? You will need to come up with an estimate of your income and deductions that you will report on your tax return. You can use a tax preparation software, bookkeeping software, or Form 1040-ES to help you calculate what you will owe.
The actual rule is “If your previous year adjusted gross income was more than $150,000 ($75,000 if you are married filing a separate return), you must pay the smaller of 90% of your expected tax for 2016 or 110% of the tax shown on your 2015 return to avoid an estimated tax penalty.”
Once you know the total amount you need to pay (using the rule above), take the amount of taxes and simply divide it by four and pay each quarter by the due date.
Want to read what the IRS has to say about it?
Or, try out one of these handy calculator to get an estimate of what you might owe: