Your Taxes are not Due on April 15

Most people assume that since you file your tax returns once a year by April 15, that’s when your taxes are due. That’s actually not the way it works. Generally, you owe taxes every time you get a paycheck or earn interest.

When you work for an employer, your employer keeps a percentage of your wages and sends them to the IRS to pay your income taxes as part of the payroll process. By April, you’ve paid most – or all – of the taxes that were owed for the last year.

When you work for yourself, the responsibility to pay your taxes falls squarely on you, and the IRS doesn’t want it in one lump sum at the end of the year. They expect you to make estimated taxes throughout the year on the amount you expect to earn in the next year. In other words, at this point, you’re making estimated taxes on what you expect to owe in federal income taxes for 2011.

Who Has to Pay estimated Taxes?

For 2011, you’ll have to pay estimated taxes if:

• You expect to owe at least $1,000 in taxes for 2011, after you subtract any credits and taxes withheld.
• You expect your withholding and taxes for 2011 to be less than 90 percent of the tax you’d normally report on your 2011 tax return of 100 percent of the tax shown on your 2010 tax return, whichever is smaller

Who Doesn’t Have to Pay Estimated Taxes?

For 2011, you don’t have to pay estimated taxes if:

- Your total tax for 2010 was $0 or you didn’t have to file an income tax return in 2010, provided that you were either a U.S. citizen or permanent legal resident of the U.S. for the entire 2010 year, and your 2010 tax year was for an entire 12-month period.

How to Pay Your Estimated 2011 Tax payments

You can pay your estimated 2011 taxes in one of two ways – either all at once in one lump sum as soon as you start earning money or in quarterly installments. The installments come due quarterly, with each installment coming due 15 business days after the end of the preceding quarter. In general, your quarterly installments will be due on or around April 15, June 15, September 15 and January 15, 2012.

The IRS supplies vouchers so that your payments are credited properly. You can also pay your estimated payments online through EFTPS – Electronic Federal Tax Payment System. You can read more about it at the IRS official site.

How to Figure Out How Much to Pay

Figuring out how much you need to pay in each quarter can be complicated because it depends on many different factors. In general, you choose from one of three options:

• Figure out how much you’ll expect to owe for 2011 based on your expected income, and pay 90% of your expected tax in 4 equal installments
• Assume that you’ll owe the same amount of taxes as you did this year and pay 100% of your 2010 taxes in four equal installments
• You can annualize your payments, where you pay installments based on how much income you actually receive during the quarter before the installment is due

You’ll have to decide which option is best for you. A tax lawyer or accountant can help you sort through your options and choose the right one.

What Happens if You Don’t Make Estimated Payments?

There’s no law requiring you to make estimated payments, but the IRS can add penalties on to the amount you owe if you’re supposed to pay quarterly estimated taxes and don’t, or don’t pay enough. You can also face criminal charges if you don’t pay your estimated taxes.

“I got into this business because I always found myself offering help to friends who dreaded filing tax returns. They thought I was strange because I actually enjoy keeping books and filing taxes. I feel right at home with numbers. In accounting they’re like puzzles which have one definite, correct solution, and knowing the answer is satisfying to me.”

A Typical Day

10:00 a.m. Andrea calls a business client: a cafe owner whose taxes she’s preparing in advance for the end of the year. “Now this is going to be fun,” Andrea says. “It’s not often that I get to tell a client that they’ve got more than enough money.” She tells Mr. Clarence that he hasn’t got enough expenses to offset his taxable income, so he should spend about $400 on something business-related that he can write off. “What’s better than giving good news like that?” Andrea says.

10:15 a.m. Andrea fields a call from a hot-tempered local business owner whose checking account is overdrawn. Unfortunately, an accountant may find herself occasionally handling very frustrated clients who’re experiencing tax problems or simply not watching their expenses.

“You’d be surprised how many business people don’t watch their checking account at all,” Andrea says. She calls the customer back and asks about some debit card transactions that occurred the night before.

“As an accountant I do sometimes deal with clients who just don’t check their balances, not even before making major purchases. Most of them won’t shoot the messenger when I have to bear the bad news of how their account is looking, but it does happen once in a while.”

11:30 a.m. Andrea meets with a new client who’s looking for someone to handle his receiving accounts for several streams of royalty income from his work in the music industry.

The two discuss ideas like investing in a retirement plan, goals for setting aside money in a savings account, and writing off travel expenses for frequent trips to Los Angeles. Andrea collects his receipts and, since his projected earnings are unpredictable, suggests a program of paying his takes quarterly instead of annually.

12:30 p.m. Andrea has reserved the next few hours for placing calls to some of the previous year’s personal tax clients. There’s a new statewide rent and property tax refund program that allows for a partial reimbursement of housing costs, and Andrea has created a list of clients who qualify. She’s calling them one by one, offering to file the additional paperwork for them simultaneously with their taxes.

3:45 p.m. The afternoon’s final scheduled appointment arrives: a nurse practitioner who’s just received a notice of audit from the state of New Hampshire. Andrea briefly interviews the nurse, looks over the receipts and past tax returns that the nurse brought along, and immediately steps in to handle the auditors. The new client is reassured that the issue will soon be resolved.

4:30 p.m. Time to go home.