Wednesday, April 12, 2006
Estimated Tax for Individuals - worse than filing taxes?!
I know it's rather down to the wire, but I'm finally posting on estimated taxes for freelancers. I looked at the form about a month ago, and didn't think much of it; but tonight I'm filling it out for the first time, and it is a headache.
Yes, I'm finding estimated taxes to be much more difficult that filing taxes. First of all, it's really hard to estimate income, let alone stuff like expenses and deductions. Secondly, the worksheet keeps warning that if you don't do it right, "you may owe a penalty when you file your taxes." Frequently they make it sound like you "may" be penalized even if it's not your fault! For example, the instructions include this dire warning in the section where they tell you what to do if you need to adjust your estimated taxes... In other words, if you inadvertently start making more during the year, you could be held liable for estimating improperly?! Whether or not that's true, I don't know - but it definitely scares me (which is, I'm sure, what they want).
In any case, the estimated tax worksheet - form 1040-ES - walks you through a simplified exemptions and deductions calculation. Once you figure out the tax you estimate you'll owe in the current year, the worksheet throws in some confusing bit about "alternative minimum tax from form 6251." I really have no clue what this is about, but since nothing looks familiar, I rather doubt I have to file it; my advice is to read the instructions and determine whether the IRS requires you to endure this additional headache.
Then you get to input your previous year's taxes; if it's less than you're estimated you'll have to pay this year, you get to go with the smaller number - yay! Once you have figured out your estimated taxes for the current year, you divide that number by four, and pay each of the four installments by the due dates given.
Here's another fun saving grace: if your estimated taxes are less than $1,000, you don't have to pre-pay! Nice, but the way they threaten to penalize you left and right, I don't think I'd trust it.
In any case, hopefully this post will get you started. If anyone more experienced has anything to add, you're welcome to post tips in the comments on the post. And if I learn anything new, I'll be sure to pass on the information, as well.