A Real Head Scratcher: How to Figure Estimated Payments for the IRS

Estimated tax payments are one way whereby individuals can submit their taxes due to the federal government. Typically, landlords, self-employed businesses, investors, and others may need to make payments of estimated taxes if the paycheck withholding with the federal government does not include all the taxes that are due. This is so because the income tax withholding from self employment is often not sufficient to pay the entire federal tax by the end of the year.

However, how do you know how much money you have to pay in estimated taxes? While there is no prescribed procedure for calculating your estimated tax payment, this simple step-by-step process will help you in determining how much you should pay in federal estimated taxes:

Generate the most recent IRS tax return. The 2013 IRS e-file Refund Cycle Chart for the year 2012 has been published, mentioning important dates when the IRS will accept your return. However, the dates are only based on estimates, and the IRS does not guarantee anything. The earlier you file your return, the earlier you will receive the returns. For the time being, you can do with the most recent tax return that you have on hand.

In the tax return statement, check for the total tax amount and withholding. On IRS returns Form 1040, total tax and withholding will be mentioned in line 62 and 63 respectively.
Minus the amount of withholding from total tax, and the result that you get is unfunded tax liability.

Consider whether you want to make monthly or quarterly payments. Depending on the same, divide the amount of unfunded tax liability by 12 if you wish to make payments month-wise, or by 4 if you want to make the payments quarterly.

Estimated tax payment is typically due by the 15th of April, June, September, and January. Despite that estimated tax are referred as quarterly payments, the deadline for making such payments are not more than three months from each other.

If you are a self employed individual, consider estimating both the regular income tax and self employment tax.

If you are expecting an increase or decrease in your income, calculate the estimated taxes on the basis of your projected total income.

Next, using Form 1040-ES, mail the estimated tax payment to the IRS. The form is a payment voucher that ensures that your estimated tax payment is correctly processed by the IRS. The payment check, payable to “United States Treasury,” should also accompany the Form, and you should also mention your Social Security Number and the year for which the payments are being made. You can also make the payment electronically via EFTPS
Make sure that you have a copy of tax records and cancelled check as a proof of payment.

To make your estimated tax payments manageable, paying monthly instead of quarterly is a better choice. Keep a track of the payment to use it for next year’s taxes. Calculate your estimated tax accurately, and make your payments likewise.

Floyd Dudar CPA

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