We all know that the Internal Revenue Service (IRS) expects to you to pay your taxes on the income you receive during the year. The average working taxpayer is accustomed to paying their taxes as they go throughout the year by income tax withholding done by their employer. This is convenient and simple for those who earn a regular paycheck and receive a W-2 form every year. For many who receive self-employment income, alimony, dividends, capital gains, or other income where taxes are not withheld, it’s important to be aware of the IRS’s requirement of making quarterly Estimated Tax Payments, including what they are and when they’re due.
Estimated tax payments are used to pay income tax, self-employment tax, alternative minimum tax, and other taxes due to the IRS in a way that is designed so that taxes are paid as you earn the income throughout the year. Individuals are required to make estimated tax payments to the IRS if they expect to owe tax of $1,000 or more when filing their tax returns. This can affect sole proprietors, partners, S-corporation shareholders, and others. Additionally, corporations are generally required to make estimated tax payments if they expect to owe $500 or more in taxes when their return is filed. Salary and wage earning employees may also have to pay estimated taxes if there is not enough tax withheld from their paycheck.
If you meet all three of the following conditions, you do not need to pay estimated taxes for the current year:
- You had no tax liability for the previous year.
- You were a US citizen or resident for the whole year.
- Your prior tax year covered a 12-month period.
Estimated tax payments for individuals are paid on a “quarterly” basis. The payment periods and payment due dates are below.
April 15 for January 1-March 31 Payment Period
June 15 for April 1-May 31 Payment Period
September 15 for June 1-August 31 Payment Period
January 15, following year for September 1-December 31 Payment Period
If these dates fall on a Saturday, Sunday, or federal holiday, the payments will be due the following business day.
Even if you are expecting a refund when you file your income tax return, you may be charged a penalty if you do not pay enough tax by the due date for each of the payment periods. The penalty for underpayment of estimated tax can be avoided if the taxpayer owes less than $1,000 in taxes after subtracting their withholdings and credits, or if they’ve paid at least 90% of their taxes timely for the current year, or 100% of the tax shown on the return for the prior year – whichever is smaller. The penalty may also be waived if your failure to make these payments was caused by casualty, disaster, or other unusual circumstance, or if you retired (after age 62) or became disabled during the tax year that estimated payments were due, and the underpayment was not caused by willful neglect.
Calculating your estimated taxes, and therefore the amounts for each quarterly payment, can be tricky. Individuals will want to use IRS Form 1040-ES, and corporations usually use Form 1120-W for making payments. Individual taxpayers will need to figure out expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. Income should be estimated as accurately as possible to avoid overpaying taxes or being assessed penalties for underpayment. Keep in mind that there are special regulations for farmers and fishermen when working with estimated tax payments.
Speaking with your accountant can help you navigate the complicated processes of calculating, paying, and forecasting your estimated tax payments. At Crippen, we have helped clients like you determine whether or not you are required to make estimated tax payments, calculate the amount of your payments, and assist you with sending your payments to the IRS since 1981. If you’re in the market for an accountant to help you navigate the sea of complicated IRS regulations, reach out to us today.