Estimated tax payments: what are they, and who pays them?
From what they are to who must make them, this article will take you through what you need to know about estimated tax payments.
Summary
Estimated tax payments are taxes paid to the IRS during the year on earnings that are not subject to withholding.
Estimated taxes are due quarterly, with each period having an associated due date.
If you underpay or miss a payment deadline, you could have to pay a penalty.
A financial advisor can reduce the anxiety around tax payments and make the tax filing process smoother.
What are estimated tax payments?
Income tax is done on a pay-as-you-go basis. For the majority, this is done by withholding – the amount of federal, state, and/or local income tax is withheld from your paycheck by your employer.
However, not all income is subject to withholding.
Estimated tax payments are taxes paid to the IRS during the year on earnings that are not subject to withholding.
So, who must make these quarterly estimated taxes?
Estimated tax payments must be paid by those who expect to owe tax of $1,000 or more when their return is filed.
These individuals can include freelancers, people who are self-employed, sole proprietors, partners, and S corporation shareholders – shareholders of corporations who elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.
Investors may also have to pay, as estimated taxes can also be used to pay taxes for any income that is not subject to withholding, such as capital gains from investments or income from rental properties.
Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.
When are estimated tax payments due?
As mentioned, estimated taxes are due quarterly, meaning you’ll make four tax payments throughout the year.
Each period has a specific payment due date. These dates are:
| Payment period | Due date |
|---|---|
| January 1 – March 31 | April 15 |
| April 1 – May 31 | June 15 |
| June 1 – August 31 | September 15 |
| September 1 – December 31 | January 15 of the following year |
If the due date for making an estimated tax payment falls on a weekend or legal holiday, the payment will be on time if you make it on the next working day.
These dates are deadlines, meaning you can make your payments as you earn your income.
This can result in smaller, more frequent payments instead of four large payments. As long as you make your payments by the due date, how often you pay is up to you.
How do I calculate my estimated tax payment?
To work out how much you owe, you need to calculate your expected adjusted gross income (AGI), taxable income, taxes, deductions and credits for the year.
You can then use the IRS-provided Form 1040-ES to calculate or figure your estimated tax.
You can also use previous years' tax returns as a guide. If you believe you will earn the same amount, this can help you make logical estimations and make those payments.
If you overestimate or underestimate, you can complete a new Form 1040-ES and recalculate your payments for the next quarter.
If you overpay tax at the end of the year, you can receive a tax refund.
Calculating your estimated tax payments can get complex quickly, so it’s best to work with an expert.
Unbiased can connect you with a qualified and regulated financial advisor who can help you navigate the complex world of estimated tax payments.
What happens if I don’t pay enough estimated tax?
If you don’t pay enough in estimated tax throughout the year, you may have to pay a penalty for underpayment.
This penalty is calculated by the IRS and is based on:
The amount of the underpayment.
The period when the underpayment was due and underpaid.
The interest rate for underpayments that the IRA publishes quarterly.
However, according to the IRS, there are some ways you can avoid this penalty:
You owe less than $1,000 in tax after subtracting your withholdings and credits.
You paid at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.
Your underpayment was due to a casualty, disaster or another unusual circumstance.
You retired (after reaching age 62) or became disabled during the year estimated tax payments were due, and your underpayment was due to reasonable cause.
How do I make estimated tax payments?
There are several ways to make estimated tax payments, including via mail, online, via the IRA2Go app, or on the phone.
It’s important to note that if you decide to complete your payment by mail, the date of the US postmark will be counted as the date of payment.
The IRA strongly encourages taxpayers to use the Electronic Federal Tax Payment System (EFTPS) when making all tax payments, citing ease of use and the ability to track payments as reasons why.
Get expert help with your taxes
Do you need help getting with your taxes?
Filing taxes can be a complex and stressful process.
A financial advisor can help lighten the load and simplify the tax filing process. They can also help you navigate complex tax rules and potentially reduce your overall tax burden.
When looking for a financial advisor, a good place to start is Unbiased.
Here, you can get matched with an independent SEC-regulated financial advisor who can ensure your taxes are in line with IRS rules and you are taking advantage of all available tax deductions.
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