When income taxes were first enacted you paid your taxes once a year at the end of the year. It was found that people are not good at saving money for taxes and mandated that the employer was responsible for withholding the taxes. This worked for those who received wages from a business but there was still no way to get the owners to pay if they were not receiving payroll. This was predominantly the wealthier of tax payers so estimated tax payment requirements came into play.

The rules are simple, if you owed taxes in the prior year or expect to owe in the current tax year then you are required to pay estimated taxes. The application is not so easy. The easiest way to set up estimated tax payments is to base them on the prior year and simply take the amount owed, subtract the amount expected to be withheld from other sources, then divide by 4 and that is your estimated tax payments. This method will also keep you from paying a penalty for underpayment of taxes however if your income changes each year there are other ways to either lower the quarterly payments or increase the payment as needed. This method requires more precision and calculations requiring that you have accurate books throughout the year so your estimates can be very precise based on your actual income for the year.

To avoid a failure to pay or an underpayment penalty these payments must be done on a quarterly basis although the quarters are not a true quarter. I believe the reason for this is to cause people to miss a payment because of the irregular schedule but that is just my opinion. The first payment is due April 15th which is the same date as when the prior year taxes are due making it very hard for people to come up with two large tax payments on the same day. The second payment is June 15th a month earlier than the quarter is over. The 3rd is October 15th adding an extra month to the calculations. The 4th is January 15th. The most often missed or late is the June payment but the January payment is close behind that because your focus has shifted to the new year.

All this boils down to planning and keeping up with your bookkeeping. Schedule some time with us to make a plan and make sure your bookkeeping is up to date.