Quarterly Estimated Tax Payments For Self-Employed Individuals:
Taxpayers who are self-employed should send in estimated quarterly tax payments to the IRS (and state, if applicable) to avoid owing a significant amount of taxes when filing by April 15th. Here are some points to consider:
If a self-employed individual anticipates earning $ 50,000 for a given year, approximately 20% of that ($ 10,000) should be set aside as money which needs to be paid for self-employment tax. In this example, the approximate federal estimated quarterly payment should be roughly $2,000 per calendar quarter, with an additional $ 500 going to the state in the same fashion. The $ 2,000 per quarter federal estimated tax payment closely approximates the 15.4% tax rate self-employed individuals face every year. This strategy will bring you close to the “income tax break-even point” (so to speak) so that the additional amount of taxes a self-employed individual may owe at tax filing time will be much more manageable from a dollars and sense standpoint. Click on this link https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes for additional estimated tax guidance.
Mail estimated payments by their due date, but make sure your Q4 payment is mailed no later than mid-December of the current year so that it’s applied to your current, not upcoming, tax year. If you don’t do this, you run the risk of having your Q4 estimated payment being applied to the Q1 period for the following tax year. This means what you still may owe for the current year will need to be augmented by the Q4 estimated payment amount (which was erroneously applied to the upcoming year). As always, make sure the memo field of your personal check is annotated as to the quarter and the tax year.
When taxpayers receive a letter from the IRS saying they owe taxes for the prior year despite their sending quarterly estimated tax payments, they typically can’t make sense of the math until their tax professional points out to them that the estimated tax payment information the taxpayer gave their tax preparer for the filing year in question doesn’t “reconcile” with the payments the IRS processed, despite all payments clearing the taxpayer’s checking account. This generally means the IRS applied a payment to the following, not current, tax year.