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 Tax
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.
Who Doesn’t Have to Pay
You aren’t required to pay estimated quarterly taxes for the current tax year if you meet all three of the following conditions:
- You had no tax liability for the prior year,
- You were a U.S. citizen or resident alien for the entire year, and
- Your prior tax year covered a 12-month period.
If your total tax was zero or you weren’t required to file an income tax return, you had no tax liability for the prior year.
How to Figure Your Estimated Tax Payment
Individuals, including those who are self-employed, partners, or S corporation shareholders, generally use Form 1040-ES, Estimated Tax for Individuals, to figure estimated tax payments.
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.
When Estimated Quarterly Taxes Are 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. If you don’t pay enough tax by the deadline each quarter, you may be charged a penalty fee even if you’re due a refund when you file your income tax return.
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.
How to Pay Estimated Taxes
You can pay estimated quarterly taxes (Form 1040-ES) by phone, mail, online, or by using the IRS2Go app. Using the Electronic Federal Tax Payment System (EFTPS) is the easiest way to pay. You can make estimated tax payments weekly, bi-weekly, monthly, whichever works best for you, as long as you’ve paid enough in by the end of the quarter. With EFTPS, you can also access a history of your payments, so you know how much and when you made your estimated tax payments.
If you need assistance calculating your estimated quarterly taxes, or you’ve fallen behind on your tax payments, call Tax Defense Network at 855-476-6920 for a free consultation. We can help you get back on track with the IRS and put together a plan to help you meet your tax liabilities.