What are Estimated Tax Payments & How Do You Make Them?

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Are you self-employed? Read this article to learn what are estimated tax payments how to make them.

What are estimated taxes and how do you make them?

Background

When you’re an employee your employer withholds your income taxes for you from each paycheck.
These employee taxes include income tax, Medicare, Social Security, etc.
However, for those that are self-employed, it is their responsibility to calculate and pay their own income taxes, Medicare, and Social Security.

Examples of people that are self-employed are freelancers, independent contractors, often lawyers, accountants, graphic designers, delivery drivers, gig workers, etc.

At this point, many people who are self-employed might be asking,

How do I calculate my income tax payments if I’m self-employed?
How much income tax do I have to pay?
When do I pay my income tax if I’m self-employed?

What are estimated taxes payments?

Estimated taxes are a way to pay taxes on income that is not subjected to withholding.
For example, taxes aren’t automatically withheld from self-employed income. In addition, taxes are not automatically withheld from income that is earned from dividends, rents, and alimony. However, when you’re an employee working for a company, your taxes are automatically withheld from each paycheck. The employing company withholds and pays these taxes for you.

You’re likely required to pay estimated taxes if you’re self-employed. Estimated taxes are paid quarterly (four times a year). The reason it is called estimated taxes is that you estimate how much income you’ll make for the year when you calculate your taxes for each estimated tax payment.

Do I have to make estimated tax payments?

You have to make estimated tax payments in situations where your income tax is not automatically withheld. These situations include:

  • Self employed income
  • Interest
  • Dividends
  • Rents
  • Alimony

How much estimated tax do I need to pay?

To determine how much each estimated tax payment will be is simple. All you need to do is determine what your estimated total taxes will be for the year, then divide that by four. Your total income tax estimation should include self-employment tax (i.e. Social Security and Medicare tax), income tax, and any other taxes.

How do I lower my taxes for self employed?

There are two ways for self-employed to lower their estimated tax payments.

First, you can create a single-member LLC, which is a proper, legal business entity in the United States. An LLC gives you more tax flexibility. The tax flexibility of a single-member LLC can result in your paying less overall tax. In addition, with a single-member LLC, you don’t have to pay quarterly taxes, you only pay taxes once a year. There are many benefits to a single-member LLC.

Many self-employed individuals, such as sole proprietors, independent contractors, freelancers, etc., feel that starting an LLC is expensive and complicated. However, there are states where the costs are very low. For example, the minimum cost to maintain an LLC in Wyoming is only $40 a year. In addition, it costs only $100 to form a Wyoming LLC. Single-member LLC formation costs are a one-time fee. Further, the benefits of a Wyoming single-member LLC go beyond the cost.

The second way to lower your self-employed taxes is to maximize your tax deductions. The best way to maximize your tax deductions is to find an easy way to keep track of your self-employed tax write-offs. The best way to do that is with an expense tracker app. An expense tracker app like Falcon Expenses allows you to log tax-deductible expenses. Snap pictures of paper receipts and store them in Falcon so that you never lose a receipt again. Or, automatically track mileage expenses with an integrated GPS tracker. Or create an odometer log in Falcon Expenses. Falcon will do all the calculations for you from your start and end odometer readings.

Related: The Complete List of Small Business and Self Employment Tax Write-Offs

How do you I pay estimated taxes?

To make estimated tax payments send in Form 1040-ES by mail. Or pay online by going to IRS.gov/payments. Or pay with a mobile app provided by the IRS; search on the app store for IRS2Go app. The last option is to pay by phone.

For more information about estimated taxes and tax withholdings visit, About Publication 505, Tax Withholding and Estimated Tax.

When do I make estimated tax payments?

The 2020 estimated tax due date schedule for each of the four payments can be found in this article, 2020 Estimated Tax Due Dates.

About Falcon Expenses

Falcon Expenses is a top-rated expense and mileage tracker app for self-employed and small businesses to track expenses and tax deductions. Falcon customers record $6,600, on average, in annual tax deductions. Get started today. The longer you wait, the more tax deductions you miss.

Automatically track mileage expenses and expenses, keep an odometer log, receipt vault and log billable hours. Quickly organize expenses by time period, project, or client. Easily create expense reports and mileage logs with your expense data to email to anyone in PDF or spreadsheet formats, all from your phone. Falcon’s expense report template is IRS compliant. Use for keeping track of tax deductions, reimbursements, taxes, record keeping, and more. Falcon Expenses is great for self-employed, freelancers, realtors, delivery drivers, couriers, business travelers, truckers, and more.

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