US Expat IRS Estimated Taxes and Payments Explained
As a US Citizen or Green Card Holder working overseas and you have income from which US taxes are not withheld, it may be necessary for you to pay estimated taxes throughout the year. Whether or not you’re required to make estimated tax payments during the tax year will depend upon a variety of factors such as your job description and the type of income you earn.
Most commonly, US Expats who are described by one or more of the following statements will be required to make regular estimated tax payments to the IRS:
You are an international employee who occasionally works in the United States
You earn self-employment income and make contributions to US Social Security
You derive income from investments
Your foreign earned income is higher than the amount you’re able to deduct through the FEIE, or Foreign Earned Income Exclusion (maximum allowance for 2012 is $95,100 for single taxpayers and $190,200 for married couples filing jointly).
Keep in mind that the aforementioned list is just the most common situations in which a US Expat is responsible for paying estimated taxes throughout the year; one or more of these statements could describe you, and that doesn’t necessarily mean that you’re required to pay your tax bill in advance. For example, you may earn more foreign income than you’re allowed to deduct through the FEIE but have enough foreign tax liability to eliminate your US tax liability by claiming the Foreign Tax Credit.
While you may not have to pay estimated taxes, it may be well worth your while to take a closer look at your situation just in case. If you need help determining whether or not you should be paying estimated taxes, you can contact the IRS or have an international tax professional at Taxes for Expats assess your situation and advise you on the best way to proceed. Generally speaking, though, you should be able to look at your previous year’s return to check your US tax liability. If you had a balance due of more than $1K last year, you should probably be making quarterly estimated tax payments to the IRS.
How to Calculate Your Estimated Tax Payments
If neither your income nor your withholdings have changed since the previous year, you can simply take last year’s tax balance and divide it by 4 to determine how much each quarterly estimated tax payment will be. So if your tax liability last year was $2K and nothing has changed, you should be making quarterly payments of $500.
If something simple has changed, you may still be able to easily calculate how much your estimated tax payments should be. For example, assume you had $1,200 dollars of federal taxes withheld last year but you don’t expect to have any withholdings this year. You would take that $1,200 and divide it by 4 then add that amount to your estimated tax payments. So assuming still that you had a $2K tax liability last year, you should make quarterly estimated tax payments of $800 ($300 extra to compensate for the taxes not being withheld this year).
If your entire financial situation has changed and you have no basis for comparison, you can still figure out how much you owe (if anything) by filling out Form 1040-ES. If you earn a consistent annual salary from which taxes are withheld, you can refer to one of your stubs to calculate your annual withholding amount. If your income fluctuates from month to month, try to come up with an average and apply it to the rest of the year.
How to Calculate Estimated Tax Payments for Self Employment Income
If you are self employed and only anticipate being responsible for US Social Security contributions, you will need to first calculate your net profit. Net profit is defined by the IRS as: Gross self employment earnings less the total amount of deductible business expenses.
Deductible business expenses are defined as “expenses which are ordinary and necessary”. These types of expenses include office supplies and furnishings, membership fees, business related travel, cost of training and development, and any other expense which is vital to the success and daily operation of your business. You may also deduct a portion of your meals and entertainment, but your deduction is limited to 50% of what you actually spent.
Once you have listed all of your deductions and calculated your net profit you will be able to figure your Self Employment tax (referred to as SE tax). To calculate your SE tax, simply multiply your net profit amount by the SE tax rate for 2012, which is 13.3%. If your SE tax liability is more than $1K you may need to make quarterly estimated tax payments to the IRS. If you don’t expect to be responsible for any other taxes, this will be your total estimated tax liability; if you are still required to pay other federal taxes, you will need to file additional forms to determine your total estimated tax balance.
How to Make Your Estimated Tax Payments
As indicated earlier, estimated tax payments are sent quarterly throughout the year and applied to the current tax year. The following list of dates shows when each estimated tax payment is due for the current tax year:
- April 15, 2013
- June 17, 2013
- September 16, 2013
- January 15, 2014.
The tax rules and regulations surrounding estimated tax payments are the same for stateside taxpayers as they are for US Expats living and working overseas. The basic rule of thumb is that if you owe more than $1K in tax liability to the IRS, making estimated tax payments will help you avoid excessive penalties.
You can pay your quarterly estimated tax payments electronically through the Electronic Federal Tax Payment System (EFTPS). In order to take advantage of this convenient electronic estimated tax payment structure, go to the EFTPS site online and complete the registration process.
You can also mail your quarterly estimated tax payment to the IRS. If you are sending your estimated taxes by mail, remit each payment along with a 1040-ES payment voucher. To find the correct IRS address to which you should send your payments, refer to the 1040-ES Instructions.
Need Help with Your US Expat Estimated Taxes?
There are a lot of factors to consider when determining your estimated US tax liability, and for some the process can be too confusing or overwhelming. Whether you need help filing form 1040-ES or you just want help finding out if you can avoid penalties by paying quarterly estimated tax payments, Taxes for Expats offers the most affordable and comprehensive expat tax assistance and is only a phone call away.