Do You Need to Pay Estimated Taxes?
August 24, 2015
Many of us may work, receive an income, and pay our taxes as we go through tax withholdings. Pretty straight forward.
However, there are other types of income sources that aren’t so simple. Estimated tax is the method used to pay tax on income that is not subject to withholding. Unlike traditional income sources, income from sources such as dividends, interest, rent, alimony, or even prize money do not have taxes withheld.
Depending on the amount of taxable income you receive, you may have to pay estimated taxes quarterly.
There are a couple of advantages to paying quarterly. Paying a portion of your taxes every quarter is much easier than a large lump sum come April 15th. In addition, estimated payments can help eliminate possible penalties or fees the IRS may assess.
So how do you pay estimated taxes?
There are several ways to calculated how much you owe, with the most common and easiest method being the Prior Year Method. To calculate using the prior year method, simply take the tax amount you paid last year and divide that amount by four.
If you are a sole proprietor, partner, S corporation shareholder or a self-employed individual, you should use Form 1040-ES, Estimated Tax for Individuals, to pay your estimated tax. Corporations would deposit their estimated tax payments using the EFTPS system.
Estimated taxes are due each year by April 15, June 15, September 15, and January 15.
For additional information, please contact us, or you can read more about estimated taxes on the IRS website by clicking here.