18 07 2016
How to Stay on Top of Quarterly Tax Payments in 2016
Although tax season came to a close last month, April kicks off another tax cycle for freelancers and other self-employed workers. Estimated tax payments are due each quarter. The first payment was due on April 18 this year, the same day as 2015 tax returns.
Due dates for estimated tax payments are ones you don't want to miss when you're self-employed. Skipping one can result in tax penalties. Plus, waiting until the end of the year to worry about your tax bill means you'll likely need to pay a large lump-sum at once. Smaller installments are much kinder on a business's cash flow.
If you're a new or seasoned self-employed worker who struggles to keep up with estimated tax payments, here are some tips to stay afloat this year:
Budget Using Percentages
Budgeting plays a major role in your ability to save for taxes. Often, self-employed workers have income that ebbs and flows, which makes budgeting a little difficult. Many self-employed professionals find that budgeting with percentages works better with variable income than does a traditional budget.
With this method, you assign a percentage of your income to all expenses (such as taxes, housing, bills). Every time you receive a business payment, no matter how big or small it is, you allocate the income to different areas of your budget using your percentages.
For example, if your budget for taxes is 30 percent, you'd immediately put 30 percent somewhere safe each time a check comes in.
Separate Your Personal and Business Accounts
It's important to keep separate accounts for personal funds and business funds even if you're a sole proprietor. Commingling money is a recipe for disaster when it comes to estimated tax payments. It's just too easy to spend the money you should be saving for taxes when it's sitting pretty in your bank account.
Open up a business account and deposit all money earned from your business there first. Then reference your budget to distribute money to your personal accounts. Keep money for taxes and other business expenses in the business account so it doesn't get touched.
There are plenty of online banks where you can set up your business account for free. Look for an account that has no maintenance fees, requires no minimum deposit and has FDIC insurance.
[See: Answers to 7 Burning Tax Questions.]
Mark Your Calendar
Put a note in your planner to remind yourself of these tax-payment deadlines:
● April 18, 2016
● June 15, 2016
● September 15, 2016
● January 17, 2016
You can make tax payments with your bank account using IRS Direct Pay. Paying with a credit card or debit card is possible through an IRS-approved payment processor, although fees may apply. You can also use Form 1040-ES and mail a money order to the IRS. This tax worksheet includes step-by-step instructions on how to calculate estimated tax payments as well.
Before using any payment method, it's a good idea to work through the tax form. You may even want to hire a tax advisor to help you the first time around. If you don't pay enough before each due date, you can get hit with a tax penalty. That's a cost you want to avoid.
[See: 6 Ways to Treat Yourself on a Budget.]
Save Your Payment Records Somewhere Safe
The IRS gives you a payment confirmation when you pay online. You can also save the transaction page from an approved payment processor if you need to pay with a credit or debit card outside of the IRS website.
Store each payment record somewhere safe on your computer or external hard drive. You'll need these records to file your tax return at the end of the year. If you misplace payment confirmations, you can call the IRS to get a balance on your account.
Not sure if you need to make estimated tax payments quarterly? Don't worry, tax rules can get a little tricky. The general rule is that if you expect to owe $1,000 or more in federal taxes filing as a sole proprietor, partner or S corp shareholder, you need to make estimated tax payments to the IRS. States require estimated tax payments as well, but guidelines vary. Check with your state for details.