If you pay estimated taxes, don’t forget that your 3rd quarter estimated payments to the IRS (and states) are due Monday, September 17, 2007. The 3rd quarter is usually due on 9/15 but since it falls on a Saturday this year, you get a couple more days to write the check and get it mailed.
If you are reading this and saying, “What the heck are estimated taxes?” and “Should I be paying them?” then read on…
Income tax is collected on a pay-as-you-go basis. For most of us, that is done by the amounts employers take out of each of our paychecks (based on our IRS Form W-4) and then send to the IRS and state agencies.
Usually it’s the self-employed folks and sometimes the retired folks who are paying estimated payments. For self-employed folks, four times a year, they need to estimate their income taxes for the year and pay estimates for those taxes and also for their self-employment taxes. Since they don’t have an employer paying the matching amount of their Social Security and Medicare taxes, they have to pay both halves. So their estimated payments are covering both income tax and Social Security and Medicare taxes.
Retired taxpayers often pay estimated taxes if there is no withholding on their pension income and/or they receive hefty income from interest and dividends and the like for which there is no tax withholding.
So when do we employees need to pay estimates? Usually it happens if we receive a high amount of income that’s taxable and there is no withholdings taken out of the income. A typical example is selling an investment, such as stock, for a large gain. We then need to do one of 2 things…either increase our wages’ withholding or pay estimated taxes.
To figure out those estimated payments, check out TurboTax’s Paycheck Withholding Calculator. Find a copy of your 2006 tax return and your (and spouse’s) latest paycheck stub(s). Then go to Paycheck Withholding Calculator. Be sure to select tax year 2007. Answer the questions on each screen. There will be screens that deal with your to-date wages and withholding and expected other income like interest and stock sale. There will be screens dealing with your expected deductions for 2007 such as mortgage interest and real estate taxes. After you’ve entered all the data, TurboTax will calculate your tax for 2007, take into consideration your to-date wages withholding(s) and let you know how much you may still owe for 2007. Again, you can either increase your wage withholding by changing your W-4 (the calculator will show the change) or pay the balance due as an estimated tax.
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