If you are self-employed and fail to make quarterly estimated tax payments, you may owe interest and penalties.
If you are self-employed and you earn enough money to pay self-employment tax or income tax, you must make estimated tax payments on or before quarterly dates designated by the IRS. If you fail to make these payments on time, you are liable to owe interest and penalties.
Estimated Tax Due Dates
The IRS requires you to make estimated tax payments for your income during the first quarter on or before April 15. Estimated tax payments for the period covering April and May are due on June 15, and estimated payments for earnings during June through August are due on September 15. Estimated taxes for the last four months of the year are due on or before January 15 of the following year. If any of these due dates fall on a weekend, you must pay your estimated taxes by the following Monday.
Estimated Tax Assumptions
When you file your income tax form on or before April 15, you demonstrate your total income earned during the previous year. When the IRS reviews your payment history to determine whether or not you have made your estimated tax payments on time, they assume that you have earned this income steadily over the course of the year, and they base your penalty assessment on this assumption. If your income is seasonal or distributed unevenly over the course of the year, you may petition the IRS for a reduction or waiver of estimated tax penalties based on this unevenness.
Estimated Tax Interest and Penalties
The interest penalty on unpaid or underpaid estimated taxes varies from year to year. The rate for 2010 is 4 percent of the taxes due. However this figure can be adjusted and prorated based on when you finally pay the taxes that you owe. For example, if your payment for the fourth quarter is late by one quarter, then you owe one fourth of the annual rate of four percent, or one percent. However, if you pay this penalty on March 15, rather than waiting until April 1, you may adjust it by one-sixth, because two weeks is one sixth of the twelve weeks in a quarter.
Exceptions
If you owe less that $1,000 in total taxes for the calendar year, then you do not owe estimated tax penalties even if you have not made quarterly payments. In addition, if you did not owe any federal tax during the previous calendar year, you may not owe interest and penalties because the IRS required you to base your estimated tax payments on your liability from the previous year.
