Halfway Point: 2nd Quarter Estimated Tax Payments Due June 15th
What you need to know as a freelancer or consultant.
If you have income that was not subject to withholding, it is more than likely that you will be required to make quarterly estimated tax payments to both the IRS and your state tax authority. This would include pass-through income from a Partnerships and S-corporations as well as income as a Sole Proprietor or a Single Member LLC.
When are payments due?
Federal deadline is June 15th, states may be different. If the 15th falls on the weekend, payments are due the next business day.
How much needs to be paid in?
To avoid penalties, you are required to pay in one-half of the lesser of:
90% of your current year tax liability, or
100% of your prior year tax liability
*If your tax liability is under $1,000, don’t worry just pay this at filing time.
The 1st quarter of the required liability should have been paid by now (along with your April 15th tax return filing), and your 3rd quarter payment is due by September 15th. If you haven’t made your payments yet, you would have incurred daily compounded interest and monthly underpayment penalties.
How are they calculated?
You will need to estimate your adjusted gross income, deductions, credits, to arrive at your projected taxable income for year. The IRS has instructions and a worksheet you can use to estimate the amount you owe.
However, on the state level, you will have to do a little more research regarding your tax liability, what credits and deductions you are entitled to as each state functions independently and have their own tax rules.
Have your Federal and State return from the prior year handy. Use this as an outline or a check that you’ve included all the income and deductible items reportable by you.
Why should you pay your estimates?
There are monthly penalties and daily compounded interest on the underpayment of your tax liability that can add up to thousands of dollars. This can be especially painful for any new business or any business for that matter. A good tax professional can help you with the calculation so you’re not paying too little or perhaps even worse, too much. Making estimated tax payments also means no big expensive surprises when you file your return. Let’s admit, we all hate those. See, 3 Ways to Make Tax Time Better.
Why should you calculate the 2nd quarter payment?
Cash flow. Typically, business owners are nervous to hear from their tax accountants because we associate CPAs with a high tax bill, rightfully so. Taxes are often the biggest cash outflow each year personally and for a business. What if you could work with your CPA to plan for this and figure out how much you will owe in April?
How do you pay them?
Here are your payment options:
IRS Direct Pay: Go directly to the IRS website. It’s secure and free, simply enroll, indicate the reason for payment (estimated taxes), and make the payment using funds from your bank account. You will need information on your prior year filings for identity verification.
EFTPS: This service is offered by the U.S. Treasury Department. Enrollment will be required.
*The options above are for your Federal tax payments only. For your state payments, go to your state tax authority’s web page and follow their instructions on how to pay. Certain states do not have an electronic payment option available yet. Specify to us which state you live in and we can give you instructions on how to pay.