Paying Estimated Taxes: What You Need to Know

The United States has a "pay as you go" tax system in which estimated tax payments are made to the IRS throughout the year. Paying quarterly tax payments often trip up self-employed workers.

Let's go over what you need to know for paying estimated taxes.

How to pay estimated taxes

Employees have their income, Social Security and Medicare taxes withheld by their employers and paid the IRS quarterly or monthly. Withholding also includes business owners who have formed corporations to own and operate their businesses.

Yet, most small business owners are not incorporated. Instead, they are sole proprietors, partners in partnerships or members of limited liability companies.  These business owners are self-employed for tax purposes.

When you're self-employed, no taxes will be withheld from your compensation by your clients and customers, or by your business itself. You have to pay your income and Social Security and Medicare taxes yourself. Typically, individuals make four annual estimated tax payments to the IRS each year.

You must pay estimated taxes if you expect to owe at least $1,000 in federal tax for the year. Yet, if you paid no taxes last year, you don't have to pay any estimated tax this year no matter what your tax tally for the year. But this is true only if you were a U.S. citizen or resident for the year and your tax return for the previous year covered the whole 12 months.

You also don't have to pay estimated tax if you have a W2 job and the amount withheld from your pay will amount to at least 90 percent of the total tax you'll have to pay.

When to pay estimated taxes

You must ordinarily pay your estimated taxes in four installments, with the first one due around April 15:

          Date      What's Due      Payment Period        April 15  Pay first installment of estimated tax  Jan. 1 - March 31    June 15Pay second installment of estimated tax April 1 - May 31  Sept. 15Pay third installment of estimated tax June 1 - Aug. 31    Jan. 15Pay final installment of your previous year estimated taxes Sept. 1 - Dec. 31        

You don't have to start making payments for any given year until you actually earn income. If you don't receive any income by March 31, you can skip the April payment.

In this event, you'd ordinarily make three payments for the year, starting on June 15. If you don't receive any income by May 31, you can skip the June 15 payment as well and so on.

Don't get confused by the fact that the January 15 payment is the fourth estimated tax payment for the previous year. The April 15 payment is the first payment for the current year.

You can also skip the January 15 payment if you file your tax return and pay all taxes due for the previous year by January 31 of the current year. This is a little reward the IRS gives you for filing your tax return early.

Yet, it's rarely advantageous to file early because you'll have to pay any tax due on January 15 instead of waiting until April 15 or 18. In other words, you'll lose three months of interest on your hard-earned money.