Posted by LWM Team on Thu, Jan 07, 2010
Small business owners and self-employed individuals often find themselves struggling with the notion of paying estimated taxes. There are essentially two ways to go about paying your taxes when you are self employed or a small business owner. The first method is to put off paying taxes until the end of each payment period and find yourself burdened with a huge tax bill; or pay taxes along the way every time you make money. The first option is great for people who don't want to think too much about their taxes and are good at saving money, while the second method is ideal for just about everyone else.
Paying estimated taxes can be a little bit confusing however it's well worth the effort of understanding. Here is where paying estimated taxes applies for most people: income from freelance work, alimony, rent payments, profit from the sale of assets, lottery winnings and prizes. In all of these cases if you expect to owe more than $1000 in taxes at the end of the year you should be making estimated tax payments.
To figure out your estimated taxes use the worksheet on form 1040 -ES, available from the IRS. It is important to recalculate your estimated payment for every payment quarter to make sure that your information stays relevant and accurate. Should you miss a quarterly payment or submit false or inaccurate information you could be subject to fines from the IRS.
The easiest way to pay your estimated tax is to use the Electronic Federal Tax Payment System available through the IRS. Using this system you are able to pay your estimated tax on a weekly, bi weekly, monthly or quarterly basis. The system also keeps track of your payment history which can be helpful when planning your next estimated tax payment.