For some, tax day comes four times a year

Tax season never ends for Americans who have to pay quarterly estimated income taxes. If you’re self-employed, you probably already know that four times a year—in mid-April, June, September, and January of the following year—the Internal Revenue Service expects you to pay estimated taxes on your current earnings. If you don’t ante up, you’ll pay a penalty: interest on the unpaid tax—currently 5 percent annually—accrued from the date your payment was due.

But lots of other folks also need to make those payments to avoid penalties. If you have a major gain during the year—from the sale of stock or property, taxable inheritance, or gambling winnings, for instance—you should pay estimated taxes on that income. Social Security beneficiaries with income from other sources, including pensions, might also have to pay. 

How does it work?

Paying quarterly estimated taxes is akin to withholding. The government wants its share as soon as possible. You can pay all of your estimated taxes on April 15 of the current year, or in equal quarterly payments. When your taxes aren’t withheld, it’s up to you to estimate what you owe.

You don’t need to make quarterly payments if the federal tax you expect to owe this year after withholding and credits is less than $1,000. If you think you’ll owe more than $1,000, you still aren’t required to pay quarterly estimated taxes if your total withholding and credits equal one of the following:

• At least 90 percent of your true—not estimated—tax liability for this year.
  
  
• 100 percent of your tax bill for last year.
  
  
• 110 percent of your tax bill for last year (for joint filers with adjusted gross incomes of more than $150,000, and individuals with AGIs exceeding $75,000).

If you will owe quarterly taxes, you can use one of two methods to determine how much to pay. If your income will probably be the same as it was last year, split the total tax you paid into four equal payments. IRS Form 1040-ES, available at www.irs.gov, includes vouchers you can print out for each quarter.

If your income is likely to be different this year, the other method of estimating your tax is to use projections. You can try using the worksheet with Form 1040-ES, which takes into account the effects of 2008 tax-law changes. Or you can hire an accountant or enrolled agent. A professional can also help you group deductions, time distributions, and capital gains to reduce your tax liability, and perhaps avoid quarterly tax payments entirely.

Easing the pain

You can reduce or avoid quarterly estimated taxes by increasing the withholding on any income from an employer, as well as from pensions and payments from IRAs and annuities. Contact your retirement plan’s administrator for details. “We suggest that for nearly everyone on a fixed income,” says Sal Falzone, chief operating officer of Rucci, Bardaro & Barrett, an accounting firm in Malden, Mass.

People who own their own businesses can increase withholding from their salaries or bonuses. If you file jointly and file a Schedule C for the self-employed, have your spouse increase his or her withholding. Your accountant can help you figure how much makes sense.

If you have yet to pay your first- and second-quarter taxes, it’s not too late to catch up—and to prepare for your next payment. At the least, you’ll avoid more penalties. In fact, this is a good time to see your accountant, just as he or she is revving up for end-of-the-year tax planning, says Robert Bonavito, a CPA in Scotch Plains, N.J. 

This article was also published in Consumer Reports Money Adviser. Subscribe now to get more expert financial advice you can trust.