Tax Issues 8

Do I just put aside the money and pay the income tax and self-employment tax when I file my income tax return each year?

The answer depends on your personal tax situation. If you expect to owe more than $1,000 over and above any withholdings or tax credits for the year, you will probably have to pay estimated tax payments. These tax payments are usually paid in four equal installments on April 15, June 15, September 15, and January 15.
As a general rule, you will have to pay quarterly estimated taxes if you expect to owe more than $1,000 in income and self-employment tax and;

• your withholding and credits for the year will be less than 100 percent of your previous year's. tax liability
  
  or
  
• your withholding and credits will be less than 90 percent of the tax liability for the current tax year

My income is never spread out evenly during the year. Some quarters I make a lot of money and some I make almost nothing. Do I have to pay the estimated tax in four equal payments?

No. You will need to annualize your income and then calculate what percentage of the total you made in the present quarter. Then calculate your estimated taxes based on that percentage. If you plan to use this method you will need IRS Publication 505 and Form 2210

All my income is from self-employment, and it looks like it will be a lot less this year than it was last year. Will I have to pay a penalty if I pay It than one,fourth of last year's taxes for each quarterly payment?

As long as you have paid in 90 percent of the tax due for each quarter you shouldn't have to pay a penalty

How do I go about sending in the payments?

Use IRS Form 1040-ES. The form includes a worksheet for your records and vouchers you fill in and submit with each payment so the payments are credited to you

What happens if I miss an estimated tax payment or don't pay in enough during the year?

You pay a penalty for amounts you owe on each separate installment. The IRS method for calculating the penalty is complicated. If you miss an installment, the IRS suggests you divide what you owe among remaining payments (so you don't underpay for the remainder of the year) and then use Form 2210 at the time you submit your taxes to annualize your income and calculate any penalty you may owe. Alternately, the IRS will calculate the penalty for you

Do I have to pay estimated taxes to the state, too?

If your state has an income tax, chances are you will need to pay a separate estimated tax to the state. Your local IRS office may have state tax information and forms. If they don't, call or write your state tax department for information. OR you may access your state, on line, using this URL: http://www.taxadmin.org/fta/link/FORMS.html

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