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How to pay estimated taxes electronically

If you are a Schedule C employee or a regular employee with significant income from stocks, dividends, or rentals, you may owe a lot of tax at the end of the year.

The IRS does not like this. They want you to pay a portion of your tax every quarter. Regular employees have tax withheld from their paycheck (usually bi-weekly or monthly). But you can get away with paying once a quarter.

If you don't make the necessary estimated payments, or pay too little, or pay late, you may have a penalty. Often, the penalty is small (say under $100), so it does not make sense to bother figuring out the estimated payments. However, as we'll see below, it is easy to pay estimated taxes over the internet.

The term quarterly payments is a little misleading, at least for individuals. The first quarter is 4 months, the second is 2 months, and the remaining two are 3 months.

In addition, you only have to pay 90% of the total tax due (or 66 2/3% if you're a farmer or fisherman). Thus you would pay 22.5% of the total tax in each installment, and the remaining 10% (or 33 1/3% if you're a farmer or fisherman) on April 15. Filing an extension means filing for an extension to file your taxes; the remaining 10% is still due on April 15.

Note that the above rule is for federal taxes to the IRS. California rules are the same as federal, but were changed slightly in 2009. The California due date of the estimated payments are the same as the federal due dates. It used to be the case that you could pay 22.5% of the tax in each installment, but in 2009 California requires that you have to pay a greater percentage of the total tax in the earlier quarters.

To summarize, if you're a cash basis taxpayer, your tax payments for tax year 2010 would be:

It is simplest to pay equal amounts every quarter, but this is not necessary.

One may pay estimated taxes by mailing a check to the IRS, or electronically over the internet. The electronic way is preferred as your check won't get lost in the mail, and you don't worry about having to make a trip to the post office. Plus, there are no fees!

Be sure to schedule your payment at least one business day in advance (same day payments are not allowed).

Exceptions

• Be aware that if you owe less than $1000 to the United States Treasury, or less than $250 to the California Franchise Tax Board, there is usually no penalty and no need for estimated payments.

• In addition, there is a rule called prior-year safe harbor that allows you to defer paying tax if your income this year is higher than last year. In particular, you only have to pay 100% or 110% of last year's total tax through withholding or equal estimated payments, depending on your income. For example, say last year your total tax was $50,000. So this year it is only necessary to pay $55,000, even if you really owe $155,000. You could invest the additional $100,000 in US treasuries or such. The payment must be through withholding (on your W-2 paychecks) or through equal estimated payments. In 2009, prior year safe harbor is not allowed in California if your income is over one million.

Below we guide you through the steps through paying electronically for both the IRS and California. In order to create your electronic account (for the IRS) or use FTB Web Pay (for California) you will need the following:

Here's how to locate your routing and account number by looking at your check. The routing number is 9 digits, and the bank account number is up to 17 digits. The check number is also printed at the bottom of the check, but it's irrelevant. You can also get the info by calling your bank.

How to set up electronic payments for the IRS

1. Go to https://www.eftps.com/eftps/. Note that this is a secure website.
2. Click ENROLLMENT in the top menu.
3. Click "I would like to enroll as:" an Individual
4. Read the page and click NEXT.
5. Read the page and click ACCEPT.
6. Continue to read each screen, enter the required info, and click the NEXT button as appropriate.
7. At some point you will be asked to choose an internet password. Choose a secure password.
8. In about a week or two the IRS will mail you a PIN number.
9. Once you receive your PIN number, you're ready to make your first payment! Click LOGIN in the top menu of the home page. Login with your internet password and PIN. Schedule a test payment of $1 for tomorrow, choose the tax year 2010, and be sure that you have this amount in your account. The next day, verify that your payment went through.

How to pay electronically in California

In the IRS system you create an account once and log in to your account each time you want to make a payment. This saves you from having to enter your name, social security number, address, and bank information every time. But in California, you have to enter this information every time.

1. Go to the http://www.ftb.ca.gov/online/webpay/
2. Click "Make A Payment" button at the bottom of the page. Note that you are taken to a secure site.
3. Click Continue.
4. Enter your social security and last name and click Login.
5. Enter the information requested on the screen. This includes the spouse name and social security, and address.
6. Select the Payment Type as "Estimate Tax" and Tax Year as 2010.
7. Enter your bank routing number, account number, and account type (checking or savings).
8. Enter the amount. For testing purposes enter "1.00", or enter the actual amount you want to pay.
9. Press Continue.
10. Review the information on the next page and check the "By checking this box I agree to the terms stated above", and click Submit.
11. Save the next page or just the confirmation number for your records.

© 2008, Pacific Tax Inc