Calculating Estimated Taxes
Because employers don't withhold estimated taxes from contractors' regular paychecks, it's up to the individual worker to settle up with the government every three months. That's right, Uncle Sam wants his cash per quarter. To avoid penalties, estimated taxes must be paid by April 15 for the first three months of the year, by June 15 for the second quarter, by September 15 for the third quarter and by January 15 for the fourth quarter. The fourth quarter deadline is extended to February 2 for people who file a year-end tax return and pay the entire balance due at the same time [sources: Bell, Yale].
Understanding when to pay is only half the battle. Estimated tax payers also need to know how much money to fork over every three months. Ideally, the tax payer is expected to calculate his or her total tax burden for the year and divide that figure by four to determine their quarterly payment amounts. Sometimes, however, that's easier said than done. Form 1040 ES is designed to help tax payers estimate their payment obligations by taking into account adjusted gross income and taxable income, as well as deductions and credits [source: Yale].
Not too keen on paying the tax man every three months? People who have full or part-time jobs in which their employer withholds some taxes can ask to increase the withheld amount in order to balance out other income that isn't taxed. Individuals who are eligible to take an IRA distribution can also have taxes withheld from this money in order to steer clear of estimated quarterly payments [source: Blankenship].
- Bell, Kay. "The skinny on paying estimated taxes." Bankrate.com (Oct. 18, 2014) http://www.bankrate.com/finance/taxes/the-skinny-on-paying-estimated-taxes-1.aspx
- Blankenship, Jim. "Understanding the Underpayment Penalty and How to Avoid It." Forbes. June 25, 2012 (Oct. 28, 2014) http://www.forbes.com/sites/advisor/2012/06/25/understanding-the-underpayment-penalty-and-how-to-avoid-it/
- Internal Revenue Service. "Independent Contractor (Self-Employed) or Employee?" Oct. 2, 2014 (Oct. 27, 2014) http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee
- Internal Revenue Service. "Topic 419 - Gambling Income and Losses." Aug. 19, 2014 (Oct. 28, 2014) http://www.irs.gov/taxtopics/tc419.html
- Yale University. "2014 Federal Quarterly Estimated Tax Payments." (Oct. 18, 2014) http://tax.yale.edu/federal-quarterly-estimated-tax-payments