Self-Employed? Just Do It...Four Times a Year!

 For most taxpayers, the amount that they owe in taxes is pre-paid to the IRS through employee withholdings, amounts deducted by employers from each paycheck throughout the year. These withholdings are required to be paid to the US Treasury by the employer periodically throughout the year. But, for those persons who are self-employed, independent contractors and the like, paying federal income taxes to the US Treasury can often get put to the side.

Because the self-employed individual receives compensation directly from its customers, rather than the periodic paycheck that most people receive, the IRS requires self-employed persons to make estimated tax payments on April 15th, June 15th, September 15th and January 15th of the following year. Quarterly estimated tax payments must be made by a self-employed individual if he or she expects to owe at least $1,000 in tax for the current tax year.

A self-employed taxpayer is required to make the quarterly estimated tax payments in amounts which equal either 25% of 90% of the amount of tax due for the current year; or, in amounts equal to 25% of 100% of the amount of tax due for the prior year. As a result, many tax return preparers and tax return preparation software compute and provide quarterly estimated tax payment vouchers based on 100% of the previous years taxes. Taxpayers should use these vouchers to make their estimated tax payments.

For many reasons, taxpayers do not make proper estimated tax payments. Generally, the end result is a large tax bill on April 15. Some taxpayers will have the resources to pay the bill in full, many others will not. Either set of taxpayers will be charged an estimated tax penalty to compensate the government for the time value of money it lost when the estimated tax payments were not made.