In America, taxes must be paid as you earn or receive income throughout the year. For many taxpayers, this is typically done when our employer pays state and federal taxes by withholding a certain amount from our paychecks each time we receive one. For those who are self-employed or receive income through other sources, however, estimated quarterly taxes may be required.
What Are Estimated Quarterly Taxes?
Estimated quarterly taxes are payments made to the IRS on income or earnings that are not subject to federal tax withholding. This may include, but is not limited to, income received through freelance or gig work, alimony, interest, dividends, capital gains, prizes, and awards. Estimated tax is used to pay not only income tax, but also other taxes such as self-employment and alternative minimum tax.
Who Must Pay Estimated Taxes
Generally, individuals, sole proprietors, partners, and S corporation shareholders must make estimated tax payments if they expect to owe $1,000 or more when they file their returns. Corporations, however, should pay estimated quarterly taxes if they expect to owe $500 or more in taxes.
If you’re an employee and your withholding doesn’t sufficiently cover your tax liability, you may also be required to make estimated tax payments. To avoid this scenario, you should perform a paycheck checkup at least once a year and update your Form W-4. A tax withholding calculator can help you determine the correct amount to withhold from each paycheck and avoid having to make additional payments during the year.
When Are Estimated Quarterly Taxes Due?
As you can probably infer from the name, estimated quarterly taxes are due four times each year. Each quarter has a specific due date.
Estimated Tax payments are due as follows:
- Q1 (January 1 – March 31) – April 15
- Q2 (April 1 – May 31) – June 15
- Q3 (June 1 – August 31) – September 15
- Q4 (September 1 – December 31) – January 15 of the following year
Please note that if any of these dates fall on a weekend or a holiday, the payment is due the next business day. You can also skip the January 15 payment if you file your income tax return and pay your taxes by January 31.
Although estimated taxes are generally paid quarterly, you may pay them more frequently. You can choose to pay weekly, bi-weekly, or even monthly if it’s easier for you to manage. Just be sure that you’ve paid enough throughout the year to avoid any penalties and interest fees. Otherwise, you may be charged a fee even if you’re due a refund when you file your income tax return.
Calculating Your Estimated Tax Payments
Individuals generally use Form 1040-ES, Estimated Tax for Individuals, to figure estimated tax payments. This also includes small business owners, partners, or S corporation shareholders.
To determine your estimated tax payment, you must figure out your expected adjusted gross income (AGI), taxable income, taxes, deductions, and credits for the year. There are two methods for estimating your quarterly tax payment:
- Method 1 – Estimate the amount of taxes you’ll owe for the year and divide by four. This is the amount you’ll send to the IRS each quarter.
- Method 2 – Estimate your taxes for the year based on your earnings to date. This is known as the Annualized Income Installment Method and it works well if your income varies. You’ll recalculate your annual tax liability each quarter based on your income and deductions up to that point. Thankfully, the IRS has a handy worksheet that can help you with the math.
If you accidentally mess up your calculations, don’t panic. You can update your Form 1040-ES and adjust your payment for the next quarter. Just remember to attach Form 2210 when you file your income taxes so you can explain why your payments varied. To avoid underpayment or overpayment issues, you can also use tax software or hire a tax professional to assist with your estimated quarterly taxes.
Corporations generally use Form 1120-W to determine their estimated quarterly tax payments. Estimated tax requirements for farmers, fishermen, and certain higher-income taxpayers are also different. Please refer to Publication 505, Tax Withholding and Estimated Tax, for additional information about these special tax rules.
How to Make Estimated Tax Payments
Thankfully, making your tax payment is much easier than calculating the amount due. The IRS provides multiple methods for making estimated tax payments, giving you the flexibility to choose the option that works best for you. The most common methods include:
- Electronic Funds Withdrawal (EFW): This method allows you to authorize the IRS to withdraw the funds directly from your bank account. You can set up EFW payments through the Electronic Federal Tax Payment System (EFTPS) or by using the IRS Direct Pay online system.
- Credit or Debit Card: If you prefer to use a credit or debit card to make your estimated tax payments, you can do so through approved payment processors. Keep in mind that these processors may charge convenience fees.
- Check or Money Order: If you prefer to pay by mail, you can send a check or money order payable to the “United States Treasury” along with Form 1040-ES (payment voucher). Make sure to include your name, address, and Social Security number (SSN) on the payment to ensure proper credit.
- Payroll Deduction: If you are an employee and also have self-employment income, you have the option to increase your withholding from your paycheck to cover your estimated tax payments. You can adjust your withholding allowances on Form W-4 to account for these additional payments.
The Consequences of Not Paying Estimated Taxes
Failing to pay your estimated taxes can lead to unpleasant consequences. The IRS imposes penalties and interest on underpaid taxes, which can accumulate over time. By not making estimated tax payments, you may find yourself facing a hefty bill at the end of the tax year, along with penalties and interest charges. It’s important to stay on top of your estimated tax obligations to avoid these unfavorable outcomes.
Tips to Simplify Your Tax Obligations
While the process of paying estimated taxes may seem overwhelming, there are ways to simplify your tax obligations. Here are some tips to help you navigate the estimated tax requirements more efficiently:
- Maintain Accurate Records: Keep detailed records of your income and expenses throughout the year. This will make it easier to estimate your tax liability and ensure that you make accurate estimated tax payments.
- Utilize Tax Software: Consider using tax software to assist you in calculating your estimated tax payments. These programs can streamline the process by automatically calculating your tax liability based on the information you provide.
- Consult a Tax Professional: If you find the estimated tax calculations confusing or need personalized guidance, it may be beneficial to seek the assistance of a tax professional. They can help you navigate the complexities of estimated taxes and ensure you meet your obligations.
Paying estimated taxes is an important responsibility for individuals who do not have taxes withheld from their income. By understanding the requirements, calculating your estimated tax payments accurately, and making timely payments, you can simplify your tax obligations and avoid penalties from the IRS. Remember to seek professional assistance, if needed, to ensure compliance and peace of mind.