I started blogging here on this site only a few months ago, but the site is already starting to generate some income. While that’s a wonderful thing, it also means that I need to start thinking about keeping track of my blog income and expenses for this site, in order to start paying taxes on the money I’m making.
If you’re making enough income beyond your regular day job, you may need to start thinking about paying estimated taxes 4 times a year as well!
Today I want to look at who needs to pay estimated taxes, and how exactly it works.
Who Should Make Estimated Tax Payments?
In the U.S we have what you call a “pay as you go” type tax system – in other words you need to pay your taxes throughout the year, instead of paying one lump sum at the end of the year.
If you have a day job your taxes are already being withheld for you in the form of payroll tax withholding. If you have it setup just right, your tax liability should be covered for the year through withholdings. If you’re off you could end up paying more than you owe (which is why so many people get refunds every year), or you could end up owing more at the end of the year. I usually end up at this end of the spectrum, although I’m usually pretty close to not owing or being due a refund.
When you add in side jobs (or investment income) to the equation – or if you are otherwise self employed, you’re probably going to need to think about making estimated tax payments throughout the year in order to cover your tax liabilities, and avoid penalties come tax time.
So how do you make sure that you don’t have to pay penalties when the year comes to an end? If you’re only making a small amount of income you can meet tax requirements through increased tax withholding at your job. Otherwise, you’ll probably need to make estimated tax payments – or do a combination of increased withholding and estimated tax payments. You’ll want to research your own situation and figure out what’s best for you.
Safe Harbor Requirements To Avoid Tax Penalties
In order to make sure you don’t have to pay penalties at the end of the year, you must meet one of the safe harbor requirements at the end of the year.
- Owe less than $1,000 for this year’s taxes.
- Withhold 100% of last year’s tax liability.
- Withhold 90% of this year’s tax liability.
To get started on the estimated tax process, just download tax form 1040-ES, and fill in the blanks to figure out approximately what your estimated tax payments should be for the coming year. If your income isn’t stable (as it isn’t for most bloggers), you may have to make a bit of an educated guess. But don’t worry – that’s why they have the safe harbor requirements, so you can avoid penalties if you’re off.
At our house we’re going to withhold 100% of our last year’s tax liability to avoid any penalties. We’re also saving up a bit of extra money for any extra tax we may owe at tax time. We’ll be saving it in a high yield savings account until tax time comes around.
When Are Estimated Tax Payments Due?
Estimated tax payments are due 4 times throughout the year. They are due on:
- April 15
- June 15
- September 15 (coming soon!)
- January 15
Please remember that estimated tax payments are NOT due every 3 months, but are spaced unevenly throughout the year. Because of that it can be easy to forget when they’re due, and miss a payment. Set up a reminder for yourself in google calendar or other software, so that you don’t forget.
Where Do I Send My Estimated Tax Payment?
You hav a couple of different options to send in and pay your estimated taxes.
- Mail your payment in: You can mail your payment in. Figure out where to send your payment here.
- Send your payment online: The Electronic Federal Tax Payment System allows you to send your payment in online. Keep in mind that you’ll need to register in advance, and it WILL take you a while to receive your required PIN number via snail mail.
State Estimated Tax Payments Are Due As Well!
When paying estimated tax payments it can be easy to forget that they’re due for both state and federal taxes – so don’t forget to pay both!
Some of the things you’ll be paying in estimated tax payments:
- Federal estimated taxes
- State estimated taxes (if your state has income tax)
- Self-employment tax of 15.3% (the social security and medicare portion of your tax).
So remember, you’re going to owe taxes on all that income you’re earning online, and taxes take a nice big cut out of that money. Even if you meet your safe harbor requirement, it can be easy to far underestimate how much you’ll need to pay your tax bill at the end of the year.
Don’t get caught flat-footed. Plan ahead and set your money aside in a high yield savings account, and have that money ready to go at the end of the year!
Do you pay estimated taxes on side income that you earn? Are you just starting to do it this year? Tell us your thoughts on making estimated tax payments, or give us your tips for remembering how to pay at the right time!
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