A lot of people don’t really understand estimated taxes, which is a problem because they can create serious complications in your financial life.
What they are: Basically, the government asks everyone to pay their taxes throughout the year. Most people get a paycheck from an employer and taxes are withheld on each paycheck. For people that are self-employed, or get paid through other types of income that don’t have those kinds of withholdings, generally the government expects them to send in payments themselves four times a year. Those are called estimated payments and you’ll put them on line 65 of your 2017 tax return.
Who is affected: So, generally 90% of your total taxes should have been paid by the time you finally file for the year on April 15. If you have a job that withholds money for taxes, and that’s going to be 90% of your tax bill, then you don’t have to worry about it. Also, if you expect that your tax balance will be less than $1000 at the end of the year, the same thing, you don’t have to pay quarterly. If you will have more than a thousand dollars of taxes due at the end of the year, then you divide up what you think you’ll owe and pay it quarterly.
Just a note, there are exceptions to who is affected, such as farmers and fishermen, and state laws can be quite different.
When: So, the payments are due on specific scheduled dates. The first one is due on April 17, 2017 (Monday!) this year, the same as tax day, and then the next ones are June 15th, September 15th, and January 16th, 2018. Each of them covers about a three month period of the year.
How much: If your income is relatively stable year to year, the easiest way to figure out how much you owe is to just assume that your total tax bill for the year before is what you are going to owe this year. If your income is going to be substantially higher compared to last year, well, our best advice is to go see your accountant. Figuring out how much is due can be complicated, and there are penalties if you underestimate.
Where: . . . Uh, everywhere? Like death, taxes are kind of inevitable.
So if you’re self-employed or don’t have a normal job with wages, keep estimated taxes in the back of your mind, and put them on your calendar so you don’t accidentally miss a payment.