Estimated Taxes - Everything You Need To Know

Overview

Estimated taxes are tax payments the IRS and your state (assuming you live in a state that has a state income tax) you pay throughout the year as a way of prepaying the amount of taxes they expect you to owe at the end of the year.  This is something that is mandated by the IRS.  It's basically their way of making sure you don't get to the end of the year and don't have enough money to pay the taxes you owe.  Estimated tax payments are typically made quarterly.

How It Works

You usually have to make estimated tax payments if you expect to owe tax of $1,000 or more when their return is filed.  The IRS will usually send you a letter telling you that you need to start making estimated tax payments throughout the year (usually quarterly).  If you don't pay the required amount each quarter, the IRS will apply a penalty of 5% or more plus interest.  So, it's really important that you make those payments on time or you could end up paying a ton more in penalties and interest.

How Much Should I Pay?

How much you should to pay depends on a few things:

• How much tax you owed in the prior year.
• How much your adjusted gross income was.
• How much you expect your taxes to be this year.

The minimum you need to pay to avoid any penalties is 90% of the tax for the current year or 100% of the tax you had to pay for the prior year, whichever is less.  This is referred to as the Safe Harbor Rule (meaning you are safe from paying any penalties).  The requirement changes if you are a high earner.  If your previous year's adjusted gross income was more than $150,000 you will have to pay 110% percent of your previous year's taxes to satisfy the "safe-harbor" requirement.

A lot of new notaries get hung up on the definition of "adjusted gross income", because that's how the IRS defines a "high earner".  Adjusted gross income is not your income (i.e. the amount of money you received).  It's your profit (income minus expenses) and then certain deductions are subtracted from that.  It can be complicated to calculate so we always recommend you pay 110% of your previous year's taxes just to be safe.  If you overpay you'll just get a bigger refund when you file your tax return at the end of the year.

How Does Using NotaryGadget Help?

NotaryGadget gives you a special category to track your estimated tax payments for each quarter and then reports it on your Profit & Loss Report so your accountant reports it correctly on your tax return so you avoid any possible penalties and interest.