What Are Estimated Tax Payments?
In the U.S., taxpayers make payments throughout the year. Your tax debt is typically withheld from each paycheck if you have an employer. However, If you work for yourself or have income outside of your employment, there’s a good chance you need to make estimated tax payments.
Estimated Tax Basics
Estimated tax payments are quarterly payments required by the IRS if you have income that escapes federal withholding. You can earn this income in many different ways, including:
- Working for yourself
- Freelancing
- Receiving rental income or dividends.
If you’re an employee, you’ll only have to pay estimated taxes if the money withheld from your paychecks fails to settle your tax liability. Because of this, most of the taxpayers who owe estimated taxes are self-employed.
Who needs to pay?
To check if you need to pay estimated taxes, answer these questions:
- After subtracting your withholding and refundable credits, do you expect to owe at least $1,000 in taxes this year?
- Will your withholding and refundable credits total less than 90% of this year’s tax bill or 100% of last year’s (whichever is smaller)?
Generally, you should make estimated tax payments if you’re self-employed and expect to owe more than $1,000 in taxes for the year. There are a few exceptions, however. For instance, if you had no tax liability last year, you won’t owe estimated taxes this year regardless of your current annual income.
Due dates
Estimated tax payments are due:
- April 15
- June 15
- September 15
- January 15
These dates may change if they fall on a weekend or holiday. Make sure you pay on time; late payments will lead to penalties.
How Do You Pay Estimated Taxes?
When you’re ready to pay, there are multiple ways to pay estimated tax payments. You can pay digitally through your IRS account, the Electronic Federal Tax Payment System (EFTPS), or the IRS2Go app.
If you want to use a debit or credit card, there are third-party processors you can use for a fee. Cash payments are possible at official IRS retail options.
You can also pay via mail using Form 1040-ES.
Tips for Making Estimated Tax Payments
Do you need to pay estimated taxes? Here are some tips to keep in mind:
- Track your income and expenses meticulously. You’ll need the data to estimate how much you owe.
- Pay on time whenever possible.
- Feel free to split your payments into smaller ones as long as you pay the total by the due date. Making 12 small payments rather than four large ones might be easier.
- Keep receipts and note each payment in your records in case the IRS asks for proof later.
- The IRS may charge you penalties and interest if you underpay estimated taxes. Use Form 2210 to figure out how much your penalty will be.
Final Thoughts
Estimated tax payments are quarterly payments made by self-employed taxpayers or those with income outside of traditional employment. The payments protect these taxpayers from IRS penalties.
Unfortunately, paying quarterly taxes can feel like extra work. You have to determine your exact liability and deal with multiple due dates on top of your regular responsibilities. That’s why working with a tax expert is a good idea.
The team at Kondler & Associates, CPAs, can help you keep track of your estimated tax payments and prevent you from paying more than required. We can also provide personalized advice about deductions and credits, potentially lowering your tax bill.
Don’t hesitate to reach out for assistance with your estimated taxes or any other tax-related matter. It’s always better to pay estimated taxes on time and avoid penalties and interest from the IRS.
