Estimated taxes are payments made to the federal, state, or local government throughout the year in lieu of filing taxes at the end of the year. Most commonly, individuals and employers with investment income such as stocks, real estate, and other assets are the most common taxpayers obligated to pay estimated taxes. When you don’t withhold enough income taxes from your paycheck, you could face a tax bill or penalty when you file your return.
Why Are Estimated Taxes Important?
Though quarterly estimated payments are an additional responsibility for taxpayers, the concept of estimated taxes helps taxpayers stay on top of their taxes throughout the year and avoid costly penalties. By completing the estimated taxes process and filing on time every quarter, there is a greater likelihood of avoiding costly fines and penalties from the government for a late filing or not paying taxes in a timely manner.
Who Pays Estimated Taxes?
Aside from individuals and employers with investments, other taxpayers who typically must make estimated tax payments if they owe $1,000 or more when they file their returns, include those with supplemental income, freelance or contractual workers, and business owners who primarily use cash to pay their expenses. Additionally, those who pay capital gains taxes, receive alimony, and collect income from rental properties are other taxpayers who are required to make estimated tax payments in lieu of higher taxes when filing their taxes.
How to Pay Estimated Taxes
Paying estimated taxes involves filling out IRS Form 1040-ES, the Estimated Tax for Individuals form. This is an important document the IRS will use for taxpayers to pay quarterly estimated taxes. Most individuals use a credit or debit card to make their payment, while business owners may need to use a check or money order. Specific deadlines for filing estimated taxes are outlined on the form and can vary depending on the year. It is important to note that payments must arrive on time to avoid paying any penalties.
Final Thoughts on Estimated Taxes
Estimated taxes are an important concept to understand to avoid fines and penalties. Although paying taxes is never fun, the IRS provides the Estimated Tax for Individuals form and other helpful resources to make the process easier. By understanding estimated taxes and following the process outlined above, it is possible to stay on top of taxes and avoid costly fines from the government.