With the 2nd quarter coming to an end, I think it is important to discuss estimated quarterly tax payments. This topic tends to freak people out and overwhelm them, so I will try to make it as simple to understand as possible!
Estimated quarterly tax payments are literal estimates of what you are guessing your tax liability to be at the end of the year broken down into 4 payments for each quarter of the year. The due dates are April 15 for the 1st quarter, June 15 for the 2nd quarter, September 15 for the 3rd quarter, and January 15 for the 4th quarter.
In order to be able to estimate what your tax liability might be and therefore what your quarterly tax payments should be it is important to have bookkeeping systems in place and have a good grasp on your business’s finances (and your family’s tax situation depending on your business structure). Having these systems in place, including having an accurate budget, will make it so much easier to estimate your year end balance and divide it by 4.
It will also help to have all your tax filings filed accurately and on time. You can use these as historical data to know what has been happening and what your tax liability has been in the past. For example, if in 2021 you owed $4,000 in tax liability and you expect your financial situation to remain exactly the same – then it would be safe to assume you will roughly have the same tax liability in 2022 of $4,000. You would then divide $4,000 by 4 to give you quarterly estimated tax payments of $1,000 each quarter.
How do you know if you are required to make estimated quarterly tax payments? If you expect to owe 90% or more than your tax liability in the previous year then you are required to make quarterly estimated tax payments. OR if you expect to owe $1,000 or more in tax liability then you are required to make quarterly estimated tax payments.
If you end up being required to make estimated tax payments and you don’t OR you don’t pay enough over the year, you will be charged a small penalty fee on top of your tax liability at roughly 0.5% of your tax liability.
You can easily make quarterly estimated tax payments online at www.irs.gov/payments, click pay now by bank or pay now by card, select make a payment, the reason will be Estimated Tax Payment, ensure to apply it to 1040ES, and ensure tax year is appropriate (for example it would be 2022 for this year), click continue, select a year to verify your identity and enter information that you used to file that tax return, select continue and enter your payment information, verify, and submit!
If you aren’t quite sure or expect to owe less than $1,000 then I recommend putting aside roughly 15% of your gross income every month into a savings account. That way when year end rolls around and it is tax season again, you can feel confident and prepared for the tax liability that you have.
If these tasks are something you would prefer to hand off to an expert, let’s chat further, email me at Amanda@stickeltax.com