Self-employed or “1099 income” is not taxed before you receive it, so you need to plan to pay income taxes on this income. If you make above a certain amount of this income, it’s recommended that you make estimated tax payments every quarter, so the IRS doesn’t charge you a penalty.
This is where keeping a good record of income and expenses pays off because you want to make sure you pay quarterly the right amount and not a penny more.
As a small business owner, hustler, or solopreneur, every money that comes out of your bank account is essential, so you want to make sure you comply with the rules while keeping more money at hand.
Who must pay estimated tax payments?
Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe $1,000 or more tax when their return is filed.
Corporations generally have to make estimated tax payments if they expect to owe $500 or more tax when their return is filed.
How to figure out how much tax to pay?
Individuals, including sole proprietors, partners, and S corporation shareholders, can use Form 1040-ES, to figure estimated tax.
Corporations generally use Form 1120-W, to figure estimated tax.
To figure out your estimated tax, you must figure out your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. Here is where that good record-keeping can keep more money in your bank account.
When to pay estimated taxes?
For estimated tax purposes, the year is divided into four payment periods:
Q1 January – March estimated taxes must be paid by April 15
Q2 April – May estimated taxes must be paid by June 15
Q3 June – August estimated taxes must be paid by September 15
Q4 September – December estimated taxes must be paid by January 15
If the dates above land on a weekend or holiday, then you have an additional workday to submit your estimated payment 🙂
You may send estimated tax payments with Form 1040-ES by mail, or you can pay online, by phone, or from your mobile device using the IRS2Go app. Visit IRS.gov/payments to view all the options.
So… how much is the penalty?
I thought you’d never ask! I wish I could tell you a percentage and call it a day but unfortunately, calculating the underpayment penalty is complicated because, unlike other IRS penalties, it’s not a standard percentage or flat dollar amount. Instead, it’s based on:
- Your total underpayment amount
- The quarter that you underpaid
- The interest rate for underpayments, which is updated by the IRS each quarter
I can estimate it for you since we use software, especially for that, but you can also do it on your own by using the forms below, just make sure you first drink your coffee and have a calculator at hand because it can get really messy really quick.
Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts,
You can also have the IRS calculate the underpayment penalty for you and send you a bill.
Want to read straight from the source? I got you! here is the link to our source: https://www.irs.gov/forms-pubs/about-publication-505
Now, if you want to save yourself from some serious math calculations and put your heart at ease, have a professional (me!) calculate your estimated taxes, Learn how we can work together!
Always in your corner,