Paying estimated taxes is required by the IRS (and states) to cover tax obligations not withheld directly from your paycheck (like through a W-2 job). While the mechanics of paying estimated taxes are relatively easy to understand when you dig into it, it can be confusing like anything else when dealing with taxes and the IRS.
While many choose to forego the obligation and eat the penalties, calculating and paying your estimated taxes per guidelines can help you save hundreds, if not thousands of dollars per year, depending on your situation.
Key Steps to Save Money Through Proper Tax Planning
- Organized Record-Keeping: Starting from the foundation of your dedicated business bank account, keeping organized financial information through quality accounting makes paying estimated taxes significantly easier by keeping the year’s estimated income at your fingertips.
- Regular Assessment and Calculation: Estimate your income and tax liability for the year ahead. This involves predicting your total annual income, deductions, and credits. Use these projections to calculate the amount of tax you’re likely to owe. Consider using tax software or consulting with a tax professional to ensure accuracy. Divide this estimated tax liability into quarterly payments following the IRS’s payment schedule, typically due in April, June, September, and January. By assessing and recalculating your estimated taxes regularly, you can adjust your payments to align with any changes in your financial situation
- Utilize Electronic Payment Methods: The IRS offers various electronic payment methods, such as Direct Pay, Electronic Funds Withdrawal, and the Electronic Federal Tax Payment System (EFTPS). These options provide convenience and security in making your estimated tax payments. Utilizing electronic methods allows you to schedule payments in advance, receive confirmation of payment, and avoid the risk of payment delays associated with traditional mail. Additionally, electronic systems often provide access to payment history, making it easier to track your tax obligations over time
ATA Context- The Meat on the Bone
It’s easy to understand why many folks don’t pay estimated taxes properly (cash flow reasons, misunderstanding of rules, and many other reasons), but it can be just as easy to trim that penalty down significantly and save a lot of money over time just by setting up some simple guardrails and utilizing a little bit of information on how the IRS guidelines work for estimated taxes.
Set up a simple tax plan now and keep money in your pockets!
