When it comes to estimated taxes, there are three questions people typically ask:
- Do I need to pay estimated taxes?
- How do I pay estimated taxes?
- How much should I pay?
The IRS addresses all of those questions here. (The rules for Oregon are substantially the same.) You should read that, if you want actual answers to those questions above.
If, having read that, you’re feeling a bit overwhelmed, here are some things to consider (though I apologize in advance if this does nothing but add to the confusion!):
- Do I need to pay estimated taxes? You don’t need to make quarterly estimated tax payments if you’re ok with paying the associated “penalty” at tax time. It’s not truly a “penalty”, though; it’s just the IRS charging you interest, an amount which depends on 1) the current interest rate environment (the IRS rate is currently around 1.25% per quarter, as of mid-2018) and 2) a weirdly complicated calculation of the quarterly underpaid balance to which that interest rate applies. So do you “need” to pay estimated taxes? No. Should you? Maybe, but that’s up to you and your particular relationship with your own money and the IRS. Some of my clients pay all of their taxes in one lump sum by April 15th, swallow any associated interest charge/penalty, and call it good. They’re able to use those funds, and earn interest or dividends or whatever, up until the date they cut that check to the IRS. It’s a totally defensible strategy; just be sure you have the funds saved up to pay off the full balance at tax time.
- How do I pay estimated taxes? You’d think you could set up some kind of monthly recurring payment, wouldn’t you? If you can figure out how to do that, let me know. For now, we’re stuck with this inane quarterly system … which isn’t even exactly quarterly, since payment due dates are sometimes 2, sometimes 3, and sometimes 4 months apart. (I’m not making this up.) You can pay by check, or pay electronically here. For Oregon, electronic payments can be made here, but be warned that it’s not an intuitive experience, so you’re probably better off mailing a check unless you’re up for a challenge.
- How much should I pay? There’s no definite answer to this. It depends on your particular tax history, and what you’re trying to achieve or avoid. Different people with exactly the same tax situation might reasonably choose to pay different amounts; there’s no absolute-right-or-wrong answer. If you’re trying to avoid the “penalty” mentioned above, the simplest way is to take your tax liability for the prior year, divide by 4, and pay that amount each quarter. This should ensure that you avoid any interest charge, but won’t in any way guarantee that you don’t end up owing a lot when tax time comes around. (That might be the case if your income is much higher than it was for the prior year, for example). If instead your goal is to cover your full tax liability, then a reasonable approach would be to pay a fixed percentage* of your quarterly self-employment income, rental income, etc. If you do that, it’s less likely you’ll owe a lot at tax time, though you’re then taking on the risk of overpaying (and foregoing investment earnings) or underpaying (and facing an interest charge).
There’s no tax form, other than a payment voucher if you’re mailing a check (see here and here), that goes along with your estimated tax payment. You’re simply sending money to the IRS and Oregon. You’re not reporting your quarterly income, or anything like that. Make the payments, keep a record of the dates and amounts paid, claim them as amounts previously paid when you file your tax return next year, and that’s it.
*(A typical amount might be 25% of your un-taxed income towards federal taxes, and 8% to Oregon. Those numbers should get you in the right ballpark, but if you’re in a high tax bracket, you might want to up it to 35%/9%.)