Estimated Tax Payments for the Self-Employed

As a self-employed individual, you will have to deal with estimated tax payments. Here are the basics of making estimated tax payments and how they work.

What Are Estimated Tax Payments?

Estimated tax payments are a way for self-employed individuals to pay their taxes to the IRS. With this system, you will estimate how much money you plan on making over the coming year and then send the IRS a quarterly tax payment. This system is different from what most employees are used to. If you are an employee, your taxes are deducted automatically from your paycheck by your employer. Therefore, the money that you receive is all take-home pay. When you make the transition to being self-employed, it can be confusing because you have to withhold the proper amount of money out of your paycheck.

Quarterly Payments

Estimated tax payments are due on a quarterly basis. If you plan on making your tax payments on a quarterly basis, you will have to make sure that you are aware of the deadlines for each quarter. The first payment for your taxes is due on April 15. The second payment is due on June 15. The third payment is due on September 15 while the last one is due on January 15 of the following year. If you are sending in your payment at the last moment, your payment must be postmarked by these due dates in order to avoid any late penalties.

Electronic Federal Tax Payment System

The Electronic Federal Tax Payment System is another way that self-employed individuals can choose to pay their taxes. With this system, you will actually set up an account with the IRS and pay your bill electronically. To do this, you can simply visit their website and fill out the necessary information. When you do this, the IRS will deduct the proper amount directly from your bank account each month. With this system, it is often more convenient for self-employed individuals as the payments will be smaller and much more manageable. Using this system, you will also not have to keep track of your money for four months at a time. 

Self-Employment Tax

When calculating how much money you should send the IRS for your estimated tax payments, you should be aware of the self-employment tax. The self-employment tax is an extra tax that every self-employed individual has to pay. This involves a tax for Social Security as well as Medicare. When you are an employee, your employer pays half of your Social Security tax for you. However, as a self-employed person, you will have to pay the entire amount yourself. Both of these taxes combined comes up to 15.3% of your income. Therefore, when calculating how much you should withhold for your taxes, be sure to allow enough to cover this extra tax. While this might seem like a large amount of taxes, you can deduct half of your self employment tax from your personal federal taxes. If you need help deciding how much money to withhold, be sure to consult a tax professional for advice.