What are Estimated Tax Payments?

When you earn income that isn’t subject to withholding, you are required to pay estimated taxes. So, if you receive only a salary at a W-2 job, you don’t have to make quarterly estimated tax payments. Whether you have an S corp or your business is a sole proprietorship, most independent contractors make income that is not subject to withholding (withdrawals or dividends) and, therefore, are required to make estimated tax payments.

 

What is the estimated tax?

Estimated tax (ES Tax) is just what it sounds like, an estimate of your personal tax liability for the year for income that is not subject to withholding, like dividends, interest, capital gains, earnings from your business, and alimony.

It is important to note, ES Tax is an estimate of the personal taxes you owe, and should not be paid by the business. Only the income listed on your personal tax return, that isn’t subject to withholding, is used to estimate your tax liability. So any income received as W-2 wages through your S corp, are not included.

Please note, some people have extra money withheld on their W-2 earnings so that they don’t have to make quarterly tax payments. This is an acceptable alternative for some. If you want to take this route, you should discuss with your tax advisor.

 

How much do I Pay?

Because it is so difficult to project the taxable income of independent contractors, your tax advisor should provide you with a percentage to set aside each quarter from your dividends or earnings (generally between 15-30%). You should keep this money segregated so that each quarter you’ll know exactly how much to pay.

Please note, since this tax is an estimate, if you overpay you’ll receive a refund at year end. If you underpay your tax liability, you could wind up facing interest or penalties from the IRS. Nobody will know your exact tax bill until your personal return is filed.

 

When do I pay?

ES Tax payments are divided into four due dates:

Due date:

Q1 April 15

Q2 June 15

Q3 Sept. 15

Q4 Jan. 15 of next year

 

How do I pay?

You have 3 options to pay your estimated taxes:

Option 1: Electronically

Direct Pay (the only free option 🙂 )

1. 1. Go to http://www.irs.gov/Payments/Direct-Pay
2. 2. Click “Make a Payment”
3. 3. Select “1040ES”. The columns will automatically populate.
4. 4. Click “Continue” (twice)
5. 5. The IRS wants to verify your identity. In order to do so, select a tax year (most likely 2014) and input the relevant requested information that would match your selected tax return.
6. 6. Accept the Privacy Act statement
7. 7. Click “Continue”
8. 8. Input the requested info and click “Continue”
9. 9. Click “Agree”
10. 10. Check the box “I accept the Debit Authorization Agreement”
11. 11. Input your info and click “Submit”
12. 12. Print the confirmation page and send a copy to us. You’re done!

Option 2: Electronically

Third-party provider (costs $2.79 if using the debit option)

Some people are uncomfortable providing the IRS with their account information. If you prefer to use a third-party, follow the steps below:

1. 1. Go to https://www.payusatax.com/main/payerinformation.aspx?category=I&selectedtaxtype=Form%201040%20Estimated%20Taxes%20-%20Tax%20Year
2. 2. Click “Continue”
3. 3. Enter your payment amount (the amount you set aside)
4. 4. Click “Next Step: Billing Information”
5. 5. Select your payment method. Please note, we highly recommend you use a Debit Card as this only costs $2.79 (just slightly more than an envelope and stamp). The payment should come from a personal account.
6. 6. Click “Next Step: Review Information”
7. 7. If all is correct, submit the payment.
8. 8. IMPORTANT: On the next page, you will be given the opportunity to “Print Confirmation”.Please print or save a copy of this payment confirmation and send a copy to us.

Option 3: Paper Check 

1. If you would prefer to pay via paper check, follow these instructions:
2. Please send us an email that you would prefer to pay via paper check.
3. We will email you a blank form that you will need to fill out and mail to the IRS along with a paper check from your personal account.

You will want to send your tax advisor the payment confirmations, to ensure that they record your payments on your tax return at year end.

Still not sure what to do? Sign up for your free tax consultation today!

CLICK HERE FOR A FREE TAX CONSULTATION

Tags: business taxes, corp to corp, estimated tax payments, how do I pay for estimated taxes, how much do I pay for estimated taxes, independent contractor, personal taxes