Guide to Adjusting Your Self-Employed Estimated Tax Payments
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If you make quarterly estimated tax payments to the Internal Revenue Service (IRS), you probably determined at the beginning of the year how much you should pay each quarter.
However, as a self-employed person or independent contractor, your income and expenses during the year may not turn out exactly as planned. You may be having a banner year and need to increase your quarterly payments. Or your business may be taking longer to get up to speed than you hoped. In that case, you may not need to pay as much after all.
Ideally, you should pay at least enough income tax every quarter to avoid penalties and interest for underpayment of estimated tax. It’s best to get as close as possible to the right amount, so you owe little or no tax when you file next year. You also don’t want to pay too much that you let the IRS hold your money at zero percent interest for twelve months. If you estimate your quarterly tax liability very carefully, you may need to pay a slightly different dollar amount each quarter.
Should I tell the IRS if I want to pay a different amount?
Some people worry what the IRS will think if their payments differ from one quarter to the next. But, you don’t need to notify the IRS if you plan to adjust your payment. You don’t even need to tell them how much you plan to pay. It’s simply up to you to send in the right amount for your situation.
The IRS doesn’t give a lot of attention to your quarterly payments until you file your annual return the following year. That’s when they look at your annual income, your total tax due, and the amounts you paid each quarter to determine if you submitted enough estimated tax.
How do I know I’m paying the right amount of estimated tax payments?
To make sure you pay the right amount of estimated taxes, you must keep up with your bookkeeping every quarter – not just at the end of the year. If you track your business income and expenses, it’s easy to estimate your tax liability and the correct payment for each quarter.
Better yet, when you keep up with your bookkeeping for tax purposes, you have vital information about your business available to help you make good business decisions all year.
How can I make quarterly estimated tax payments easier?
Most self-employed people will agree – the hardest part of making estimated tax payments is coming up with the money to pay them.
Consider setting money aside for estimated tax payments in a separate account as you earn income.
Can I get money back if I overpaid one quarter?
It doesn’t matter if you pay too much or too little one quarter; you can’t get the money back from the IRS until you file your tax return. That’s one reason why it’s so important to get your estimated tax payments right. You may have a better use for that money now – not next year.
If you overpay one quarter, you may be able to skip the following estimated tax payment altogether. Your minimum quarterly payments to avoid a penalty are cumulative. In other words, if you paid enough in the first quarter to cover both the first and second quarters, you won’t be penalized for not sending a second-quarter payment.
If you or your spouse also earn income as employees, and you have overpaid your quarterly estimated taxes, you may want to file a new Form W-4. Doing so can help temporarily reduce your income tax withholding to make up for the excess payments. But, don’t forget to adjust your Form W-4 back to normal when necessary.