As we get nearer to the end of the year and the upcoming tax season next year, it’s really important to talk to you about estimated taxes.
If you are paid by w-2 or otherwise have taxes withheld by your employer, then this post is not going to apply to your situation. Rather, this post is for taxpayers who get paid, but do not have any withholding from their income for federal income taxes.
If you are paid by 1099 or otherwise receive income that has no tax withholding, then the IRS expects you to set aside a portion of your income to be paid quarterly as estimated taxes. You are required to complete a 1040es quarterly form and mail your payment to the address for your state. The link to 2018’s 1040es form and instructions is below.
What is the purpose of estimated taxes? The purposes of paying quarterly estimated tax payments are many. By paying estimated taxes, the general idea is that you will not carry forward large tax bills year after year and require an installment agreement to pay your taxes back that has to be revised year after year to include that year’s balance. Another reason for paying estimated taxes is a matter of fairness. The IRS wants to make sure you are paying your fair share. A final important purpose is not paying your estimated taxes will affect your ability to receive the benefit of an offer in compromise. If you file an offer in compromise and owe estimated taxes, the IRS offer in compromise department won’t even review your offer if it isn’t paid. Moreover, if you receive an offer in compromise you CANNOT OWE FOR 5 YEARS after acceptance. So, not paying your estimated taxes would cancel out the offer and you’d be back to square one.
The million dollar question is how much am I supposed to withhold and pay as estimated taxes every year? The best bet is to use the worksheet attached to the 1040es form. Keep in mind the amount of deductions you have, net operating carryforward losses and other taxable events that reduce the overall tax you pay will still ultimately affect your bottom line tax bill at the end of the year. But, paying estimated taxes helps you stay ahead of the game and keeps you from writing a large check to the IRS at the end of the year so it’s definitely important to consider.
Follow this link to find out how much estimated taxes to pay this year and where to send it: https://www.irs.gov/pub/irs-pdf/f1040es.pdf