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Estimated Taxes: Who Has to Pay Them and How?

The majority of taxpayers pay their taxes due annually when filing their tax return for the year. In some circumstances, however, taxes must be paid to the IRS on a quarterly basis. These tax payments are called estimated taxes because they are based on the amount of income that an individual or business expects to make for the year.

tax estimates for businessAdditionally, they often do not take into account the full number of deductions or credits that the person or entity will be eligible for later in the year. If the actual tax owed at the end of the year is higher or lower than the estimated payments, an additional payment is made or a refund is issued.

Although there are specific rules determining which individuals and companies must pay estimated taxes, in general, it applies to anyone who does not have taxes taken out of a regular paycheck. Individuals and businesses that fail to pay estimated taxes when required may be subject to late penalties by the IRS. Here is a more detailed breakdown of how estimated taxes work.

Individuals

Any individual who does not have taxes taken out of a regular paycheck is required to file estimated tax payments with the IRS. This applies to self-employed workers, freelancers, contractors and a variety of others. Note that there are special exceptions for fishermen and farmers. In addition, there are income requirements that an individual must meet that necessitates the payment of estimated taxes.

In general, if you expect to owe $1,000 or more in taxes after filing your annual tax return in April, you are required to pay estimated taxes.

To determine how much to pay in estimated taxes, take the smaller number of either of the following:

  • 90 percent of the tax expected to be on the individual’s current year’s tax return, or
  • 100 percent of the tax shown on the individual’s prior year’s tax return

Paying Estimated Taxes for Individuals

Paying estimated taxes for individuals requires that they complete form 1040-ES, and mail the payment voucher along with the tax payment to the IRS address listed on the voucher.

Alternatively, individuals can pay their estimated taxes online at www.irs.gov/payments. You may also pay via phone by calling 1-800-555-4477. Estimated taxes are broken down by quarter and are due on the following dates: January 15th, April 15th, June 15th and September 15th.

Business Entities

In additional to individuals, some business entities are also required to pay quarterly estimated taxes. Generally, a business that files as a corporation must make estimated tax payments if they are expected to owe more than $500 in taxes when they file their annual tax return.

Paying Estimated Taxes for Businesses

Corporations that are required to pay estimated taxes must do so by completing IRS Form 1120-W, Estimated Tax for Corporations, and mailing it to the IRS address on the voucher. Alternatively, corporations can pay estimated taxes online using the Estimated Federal Tax Payment system (EFTPS) at www.eftps.gov. Estimated payments are due four times per year on the 15th day of the 4th, 6th, 9th and 12th months of the corporation’s tax year.

To determine how a corporation must pay in estimated taxes, each installment payment must be the smaller of either of the following:

  • 25 percent of the tax expected to be on the corporation’s current year’s tax return, or
  • 25 percent of the tax shown on the corporation’s prior year’s tax return.

If you need assistance with your estimated tax payments or any related tax matter, please feel free to reach out to us at Dukhon Tax.

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