Disclaimer: This article is meant for informational purposes only and does not constitute tax advice. For tax advice, please seek a tax professional. For the most up to date tax information, refer to IRS.gov.
The good news is your eBay business is starting to take off. You’re turning a profit this year. Awesome! But if you’re a sole proprietor or self employed, like many eBay sellers, and expect to owe the IRS $1000 or more in taxes this year, then you are required to pay estimated taxes.
What are estimated taxes?
According to IRS.gov, estimated taxes are:
…used to pay income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough through withholding or estimated tax payments, you may be charged a penalty.
When you work for a company, your employer withholds your income tax for you. Easy. When you sell stuff on eBay and expect to pay $1000 or more in income taxes in a year, then you must send the IRS checks or electronic debits of estimated tax payments throughout the year (or in one lump sum in advance). If you expect to owe less than $1000, then you can wait until you file your tax return to pay.
How do I calculate how much I need to pay in estimated taxes?
Many accounting programs like Intuit or GoDaddy Bookkeeping will calculate estimated tax for you. Otherwise, use last years tax return as a starting point then estimate whether you expect to earn more or less money this year. You may adjust your estimated tax payments throughout the year if your income fluctuates. IRS Form 1040-ES can help you calculate your estimated tax payments as well.
What if I overpay estimated taxes?
There’s no penalty for overpaying estimated taxes. If you end up paying more taxes than you owe, then you might qualify for a tax refund when you file that year’s tax return.
What if I underpay estimated taxes?
Be careful, underpaying estimated taxes could land you a penalty! You need to pay at least 90% of the tax for the current year OR 100% of the tax shown on the previous year’s tax return (whichever is smaller). Any underpayment and/or penalties (if applicable) must be paid for when you file your tax return. High-income taxpayers ($75,000+ in 2014), must pay 110% in estimated taxes in advance to avoid an underpayment penalty.
Estimated Tax Payment:
Due April 15 (for income received Jan. 1 through March 31)
Due June 15 (for income received April 1 through May 31)
Due Sept. 15 (for income received June 1 through Aug. 31)
Due Jan. 15 (for income received Sept. 1 through Dec. 31)
What if I pay estimated taxes late?
Paying your estimated taxes late could trigger a penalty. Please refer to the Estimated Tax Payment Calendar.
How do I pay estimated taxes?
The IRS accepts payments online, by phone or by mail. Please refer to the IRS website for more detailed instructions.
What about state estimated taxes?
Laws regarding estimated state income taxes vary from state to state. Please refer to your state government’s website for more tax information.
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No two taxpayers are alike. If you have questions about your specific tax situation, contact the IRS or consult a tax professional.
Resources:
Estimated Taxes (from IRS.gov website)
The Skinny on paying estimated taxes (article on Bankrate.com)