Although Estimated Tax Deposits (“ETD”) are applicable to any income not subject to withholding taxes, the most common scenario is among self-employed individuals. Self-employed individuals make up about 7% of the workforce. Self-employed individuals are required to make ETD over the course of the year so that when they file their returns the following April, the tax balance has already been paid.
The general rule is that the IRS requires ETD if you will owe $1,000 or more at the end of the year after accounting for any tax withholdings, payments or credits. The amount you are required to pay in deposits is either 100% of the tax that you owed the prior year, or 90% of your actual tax due for the current year, which ever is smaller. Because in most cases it is so difficult to predict the future, the most common way to calculate your required estimated tax deposits is to use the tax due for the year before.
Let’s look at an example, John is a plumber who works for a contractor that issues him a 1099-MISC at the end of the year. John owed $4,000 in taxes in 2013 when he filed his Income Tax Return. In 2014, his ETD will be $1,000 per period so that when he goes to file his tax return, he has total deposits of $4,000. Any additional tax balance would then be due on April 15th 2015.
Other more common example of individuals who are required to make ETD are those who receive income from alimony, gambling winnings, and annuity or pensions not subject to tax withholdings.
If you are an employee, you should make sure that you have enough taxes withheld from your wages to cover any balance due. You can check by going to IRS.gov and searching “Withholding Calculator.”
The lesser of 90% of your anticipated current year’s tax liability or 100% of your last year’s tax liability divided into four equal payments.
- 1st payment: April 15, 2014
- 2nd payment: June 16, 2014
- 3rd payment: September 15, 2014
- 4th payment: Jan. 15, 2015*
*You do not have to make the payment due January 15, 2015, if you file your 2014 tax return by February 2, 2015, and pay the entire balance due with your return.
Complete the applicable payment form voucher and mail it along with a check made payable to “The United States Treasury” to the appropriate IRS service center based on where you live. By clicking here you will be able to correctly calculate and make your Estimated Tax Deposit.