As you are reading this, if you are in fact reading on the same day this was written, both the federal and New Jersey government are reaching deep into my bank accounts. At the end of the day, I will find myself worth several thousand dollars less than at the beginning of the day. Today is the day quarterly estimated taxes are due for those of us who live in the United States and for those who opt or are required to make these payments.
Last year, I didn’t pay enough through estimated tax payments and I was subject to a small penalty tax. I believe I’ve calculated the correct amounts this year to avoid paying extra. Like last year, I enrolled in automatic tax payments for both the federal and state income taxes. This saves the trouble of sending checks, but it necessitates having the right amount of money in my bank account at the right time.
To handle this requirement and to further automate my finances, the accounts are funded monthly to ensure I’m saving enough for both quarterly estimated payments and what will likely be another significant final tax bill next April.
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{ 7 comments… read them below or add one }
I find estimated taxes confusing. I have a feeling I should be paying them; I didn’t get dinged for a fee for my 2008 taxes, but TaxCut had to do a calculation to assure me of this. My problem is that I do some freelance work that’s just completely not steady–I could go months without getting work, and I have no way of knowing how much money I’ll make at any given time. Right now I’m working on a sizable project, and have made at least a bit of money each month this year. Can you start paying estimated taxes mid-year? Can I pay taxes on just the money I made this quarter? I’m so confused!
Sorry. I just needed to vent there a minute, but any guidance on the mystery of estimated taxes would be helpful.
Kevin M said most of it in his response below. It’s fairly painless setting up electronic quarterly payments, though I can only speak about federal and New Jersey. Whatever you do, track it well, because if you make irregular quarterly payments, there’s a bigger chance that the government will mess up their own records and you’ll have to prove your payments.
@Barb – you can start anytime and end anytime. If you make a bunch of freelance money in May, pay a payment in June. If you make nothing the rest of the year, don’t pay anything else. That’s the general idea, but look up Form 1040-ES and instructions on http://www.irs.gov for a better idea of when you are REQUIRED to pay estimated tax.
I have a follow up question on this one.
I have received a check for independent consultant work I have been doing in May. I was not sent a 1099 or any of the IRS forms yet by the employer. Do I still need to pay the Estimated Taxes for June? Or can I wait for the employer to send me 1099 and then pay the quarterly estimated taxes?
I have set up the electronic account. I am just waiting to see If I can enjoy the money little more longer, before I pay my taxes :)
@Peter – you likely won’t get a 1099 for 2009 work until sometime in January 2010 and maybe not at all if it’s under the filing threshold of $600. The IRS basically prorates any tax deficiency over the 4 quarters. However, if you fill out a special section of the Form 2210, you can specifically allocate that 1099 income to a certain quarter and thus should pay the payment for 2nd quarter if you think it’s large enough to warrant. Are you employed and have withholding otherwise? That would certainly factor in to the calculation. Also, don’t forget as a 1099 consultant you’ll have to pay self-employment tax as well as income tax which is another 15.3%.
@Kevin
Thanks that helps a lot. I have just recently started as a independent consultant in the IT software industry. Previously, I used to get a W-2 as a full time employee, which was a lot easier to handle. This is little new to me, and I am finding out information about the consulting gig now. Thanks for your reply.
Can anyone recommend tax preparation software that will allow me to make 2009 estimated tax payments with a credit card? I would like to avoid paying a service provider and learn to do this myself.
Thanks in advance!