How Do I Know If I Have To File Quarterly Individual Estimated Tax Payments?

By Author: Jeff Parrack
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People who spend their careers as someone else's employee are subject to the withholding of taxes, based on information that they provide on their W-4 forms. When payrolls are processed, the employer or its agents (payroll firms, for example) add up all the employee withholding and remit it to the government. This means that people who do not look too closely at their pay stubs really don't know what's going on with their taxes until the first months of the following year, when they file their returns.

Self-employed people, and people who have a second side job, are paid without this withholding taking place. For the Treasury Department to keep tabs on its tax receipts and plan for the government's budget, however well- or poorly-managed it may be, the IRS requires these earners to file returns (called "estimates") four times a year - and pay taxes each time, as well. The intention is to treat people as fairly as possible and have the funding of the government shared as equitably as possible across various types of earners, as well as various levels of income. This is a difficult thing to do in the best of situations, ...
... which is why the tax code is constantly being amended and updated.

Who pays?
The IRS, essentially, expects self-employed people (and people earning extra income where withholding does not take place) to pay their taxes on a "rolling basis" just like the rest of the population does through workplace withholding. To encourage compliance, the IRS assesses (as of now) 8% annual interest on the unpaid taxes of folks that don't pay on the quarterly payment dates, calculated daily, plus possible penalties. That's right - the IRS charges interest and penalties if you don't (1) accurately estimate taxes at least quarterly and (2) send a check with the form(s) if you owe anything.
IRS Publication 505 covers all the ins and outs of estimated tax payments, with detail that may require some people to get professional advice. Simply put, if you are self-employed or make extra income that does not have federal income taxes withheld - whether or not you get a 1099 form from every source - you will most likely have to make the quarterly estimated payments. Only if you expect to make less that $1,000 are you exempted from this reporting (and paying) requirement.

How it works, and when
Generally speaking, if you are self-employed you will need to remit from 22.5 to 28% of your gross income, a minimum of four times each year. This will cover both your income taxes and your Social Security payments. It can get a bit more complicated if you are employed full-time and make other, extra money from non-withholding sources, but it's likely that you need to make estimated payments if you owed taxes last year (or had just a modest refund) and are earning over $1,000 from those non-withholding side jobs.

The estimated payments are due four times a year, at which time you pay the proper percentage of your income from which no taxes were withheld at the time of that particular payment. For income that you earn between January 1 and March 31, you must file and pay by April 15. For the other quarters - April 1 to May 31, June 1 to August 31 and September 1 to December 31 - your deadlines are the 15th of June, September and January, respectively.

Special situations
The more varied the mix of your income sources - employment, side jobs, interest, investments, etc. - the more complicated your tax situation becomes. The tax code occupies several library shelves at this point, and it can be difficult to stay abreast of all the rulings, new taxes, amendments, exclusions and requirements that are added every year. If you are confused by any of the regulations covering estimated tax payments, it would probably be a good idea to consult a professional in the field - a tax preparer, accountant or financial planner. If you have already gotten into a bind over self-employment income, you may also want to consult a tax lawyer.

If you have a simpler situation - for example, you work for a single company as an independent contractor and receive a single 1099 reporting income - you should be able to manage your estimated tax filings with a little research and elbow grease of your own. However, the "tax filer's number one rule" should still apply. If you are confused or unclear about anything at all, or unsure that you are getting the best possible results in your filing, you need to get some professional help. It is just about always cheaper that making a mistake and paying too much in taxes, or paying too little and getting hit with penalties and interest.
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