04/ 04/ 2006
by Jeffrey Moses
Too many people think of taxes as an April-only event. But if you're self-employed and paid taxes last year, you've probably already received your 2006 estimated tax package from the IRS in the mail. This includes 1040-ES/V instructions, payment vouchers and even envelopes to make it easier for you to send in payments.
Estimated tax payments for 2006 are due quarterly on April 17, June 15, Sept. 15 and Jan. 16, 2007. Penalties accrue when you miss a payment or pay late for any quarter.
Self-employed individuals need to anticipate these dates, putting money aside in advance to avoid a last-minute scramble. The easiest way to make sure that you have enough money when payment dates arrive is to simply put aside an adequate percentage from every check you receive. To determine the minimum amount you need to pay each quarter during 2006, divide your total 2005 tax payments by four. If you earn more in 2006 than you did in 2005, you'll need to ultimately pay more in taxes, so you should take a higher percentage out of each check. By paying the minimum amount due, you will at least not be subject to penalties.
Taking money out of each check takes discipline. You always have bills to pay, and there is always the temptation to forget about the whole thing until the day payments are due. Experienced entrepreneurs, however, know that it’s easier on the psyche to take a little out of each check than to scramble for funds at the last minute or perhaps even be forced to take out a loan.
The simplest way to have estimated tax money ready when you need it is to set up a special checking or money market account for the purpose. When a check comes in, and you're filling out a deposit slip, simply write out a check to this special account for the designated amount. Some of your deposits to this special account may be small––as little as $25––but don't put off making a deposit thinking, “What difference can $25 or $50 make?” These checks add up in three months, and when your estimated tax is due, you'll have what you need to make payment.
Inevitably, you'll feel tempted to take money out of this account for other purposes. But don't think of this account as a general savings account. It is for one purpose only.
After several estimated tax periods, you'll be grateful for the convenience that comes with already having the payment amount saved. After that, you'll think of this system as a necessary method of operation.
Notes from 1040-ES/V instructions include:
- Estimated tax is the method used to pay tax on income that is not subject to withholding.
- To avoid penalties, you must make estimated tax payments if you expect to owe at least $1,000 in tax, and you anticipate that your 2006 withholding and credits will be less than the smaller of either: 90 percent of the tax shown on your 2006 tax return or the total tax shown on your 2005 return (110 percent if you are not a farmer or fisherman, and the adjusted gross income shown on your 2005 return is more than $150,000).
- You do not have to pay estimated tax for 2006 if you had no tax liability for 2005.
