The IRS offers Form 1040-ES to help you calculate and pay estimated taxes for the current year. Unlike the standard 1040, which applies to the previous year, Form 1040-ES helps you estimate the taxes you will owe this year. It’s commonly used by those who receive income that isn’t subject to automatic tax withholding, such as freelancers, contractors, or individuals earning interest, dividends, or rental income.
Who needs to pay estimated taxes?
Not all income has taxes deducted automatically. If you’re an independent contractor, freelancer, or self-employed, you likely don’t have tax withheld from your payments. This is also true for income earned from interest, dividends, rental properties, unemployment compensation, and even the taxable portion of Social Security benefits. If you receive any of these types of income and expect to owe at least $1,000 in taxes after accounting for credits and deductions, you may need to pay estimated taxes throughout the year.
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How to calculate estimated taxes
When estimating your tax payments for the current year, you can refer back to the previous year’s income tax return filings. Many taxpayers will use Form 1040-ES, which provides worksheets for the year they are calculating estimated tax to adjust for any income, deduction, or credit changes expected in that year. This will help in determining the total tax due for that particular tax year.
One way to avoid any additional penalties would be to pay a minimum of 100% of the taxes due for the previous year. By doing this, you are typically safeguarded from penalties related to underpayment of taxes, even if the tax owed for the current year is higher. In the case of underestimation and therefore underpayment of the estimated taxes, however, there may be a fine.
Making estimated tax payments
Estimated taxes are paid quarterly, with deadlines on April 15, June 15, September 15, and January 15 of the following year. It’s crucial to make these payments on time to avoid penalties, even if you overpay and are eligible for a refund later. If you miss a deadline, the IRS may charge you a penalty for underpayment, even if you end up paying the full amount for the year.
You also have the option to make a single lump-sum payment for the entire year by April 15. This can simplify the process if you prefer not to keep track of quarterly payments.
Who should file form 1040-ES?
To ascertain whether or not you need to file Form 1040-ES, weigh your total tax liability from the previous year against 90 percent of the tax you expect to incur in this current year. If at the end of the credits and deductions, you are left with at least one thousand dollars due, and your withholding or other payment on account does not meet at least ninety percent of the current year’s estimated tax, then it is time to consider filing estimated tax payments.
On the other hand, if you had no tax liability in the previous year, were a citizen or resident of the US for the whole year, and the previous year consisted of all of 12 months, then you do not have to make estimated tax payments.
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Key dates for filing form 1040-ES
In general, estimated taxes must be paid quarterly by most taxpayers on dates due as follows: April 15, June 15, September 15, and January 15. In any case, if any of these dates happens to be on a weekend or holiday, the deadline for payment is the next working day. Also, for taxpayers who operate within a fiscal year, the due dates are also shifted, according to the relevant fiscal calendar.
Annual income tax payments are made in installments based on one’s income. This way, it is possible to make predictions on the tax obligations and make payments on time or even before the tax obligations arise. Use Form 1040-ES, and you will be fine with respect to taxation.
