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Do I need to make quarterly estimated tax payments?

Updated: Jun 19, 2023


What are Estimated Tax Payments?

Estimated tax payments are periodic payments made to the IRS throughout the year to cover your income tax liability. These payments are generally required for self-employed individuals, business owners, and taxpayers who don't have income tax withheld from their earnings.


Who Needs to Make Quarterly Estimated Tax Payments?

Individuals and businesses may need to make quarterly estimated tax payments if they:

  1. Are self-employed or own a business

  2. Have income from investments, dividends, or rental properties

  3. Receive alimony, taxable Social Security benefits, or other sources of income not subject to withholding

Generally, you must make estimated tax payments if you expect to owe at least $1,000 in taxes after accounting for your withholding and refundable credits. If you do not make estimated tax payments and you are required to, you may face underpayment penalties, fees, and interest, so it is important to check regularly and make sure you are not required to make estimated tax payments.


Calculating Your Estimated Tax Payments

To calculate your quarterly estimated tax payments, follow these steps:

  1. Estimate your taxable income: Determine your adjusted gross income (AGI), accounting for deductions and credits.

  2. Determine your tax liability: Apply the appropriate tax rates to your taxable income.

  3. Subtract withholding and credits: Deduct any income tax withheld from your wages, as well as applicable refundable credits.

  4. Divide by four: Divide the remaining balance by four to determine your quarterly estimated tax payments.

You may use Form 1040-ES to calculate and submit your estimated tax payments. The IRS also provides an online tool called the Tax Withholding Estimator to help taxpayers determine their estimated tax payments.


Important Deadlines for Quarterly Estimated Tax Payments

Deadlines for quarterly estimated tax payments typically fall on the following dates:

  • April 15th for the first quarter

  • June 15th for the second quarter

  • September 15th for the third quarter

  • January 15th of the following year for the fourth quarter

Note that these deadlines may be adjusted if they fall on weekends or federal holidays.


How to Pay Your Quarterly Estimated Taxes

There are several methods to pay your quarterly estimated taxes, including:

  1. Direct Pay: Make a direct payment from your checking or savings account through the IRS's Direct Pay system.

  2. Electronic Federal Tax Payment System (EFTPS): Enroll in EFTPS and schedule payments online or by phone.

  3. Credit or debit card: Pay your estimated taxes using a credit or debit card through an IRS-approved payment processor.

  4. Check or money order: Mail a check or money order to the IRS along with the payment voucher from Form 1040-ES.


Penalties for Underpayment of Estimated Tax

If you fail to make the required quarterly estimated tax payments, the IRS may impose a penalty for underpayment of estimated tax. This penalty is calculated based on the difference between your required estimated tax payments and the amount you actually paid.


To avoid penalties, ensure that you:

  • Pay at least 90% of your current year's tax liability through withholding and estimated tax payments, or

  • Pay 100% of your previous year's tax liability (110% if your AGI is over $150,000) through withholding and estimated tax payments.

Amending Your Estimated Tax Payments

If your income or deductions change significantly during the year, you may need to amend your estimated tax payments. To do so, recalculate your estimated tax payments using updated income and deduction information, and adjust your remaining payments accordingly.


Conclusion

Quarterly estimated tax payments are essential for many taxpayers, particularly those with income not subject to withholding. Understanding the requirements and deadlines for these payments can help you avoid underpayment penalties and stay compliant with IRS regulations. By carefully calculating your estimated tax payments, keeping track of the relevant deadlines, and making adjustments as needed, you can ensure that you meet your tax obligations in a timely manner.


Frequently Asked Questions About Quarterly Estimated Tax Payments

To further clarify the concept of quarterly estimated tax payments, here are some frequently asked questions and their answers:


Q: Can I make more frequent payments than quarterly?

A: Yes, you can make more frequent estimated tax payments if you prefer. The IRS allows you to make payments as often as you'd like, as long as you meet the total required payment by each quarterly deadline.


Q: What if I overpay my estimated taxes?

A: If you overpay your estimated taxes, you may receive a refund when you file your tax return for the year. Alternatively, you can apply the overpayment as a credit toward your estimated taxes for the following year.


Q: Can I skip a quarterly payment if my income is lower than expected?

A: If your income is lower than anticipated, you can recalculate your estimated tax payments and adjust your remaining payments accordingly. However, you should still ensure that you meet the 90% or 100% payment thresholds to avoid underpayment penalties.


Q: Are there special rules for farmers and fishermen regarding estimated tax payments?

A: Farmers and fishermen have unique rules for estimated tax payments. They must generally make only one estimated tax payment by January 15th of the following year, covering their entire tax liability. To avoid penalties, they must pay at least two-thirds (66.67%) of their current year's tax liability or 100% of their previous year's tax liability.


In conclusion, understanding the nuances of quarterly estimated tax payments is crucial for taxpayers with income not subject to withholding. By diligently estimating and paying your taxes on time, you can avoid penalties and maintain compliance with IRS requirements.


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