Estimated Tax Payments

What are quarterly estimated tax payments? #

Quarterly taxes are estimated tax payments made to the IRS four times a year and they can be divided into two categories:

1. Self-employment tax: This 15.3% tax is made up of both employee and employer portions of Medicare and Social Security taxes. If you’re a salaried employee, your employer will split the cost of these taxes with you. However, when you’re in business for yourself, you’re responsible for everything.
2. Income tax: Your income will be taxed at your income tax rate.

Who should make estimated quarterly tax payments? #

People and companies that don’t have enough withheld from their income should pay estimated quarterly tax payments. If you’re self-employed and don’t have an employer to withhold your taxes, then it’s your responsibility to pay the IRS directly. This usually includes freelancers, independent contractors, small-business owners, and larger corporations.

• Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.
• Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.
• If you expect to owe more than $1,000 in federal taxes for the tax year, you may need to make estimated quarterly tax payments using Form 1040-ES, or else face a penalty for underpayment.
• If your federal income tax withholding (plus any estimated taxes you paid) amounts to at least 90% of the total tax that you will owe for this tax year, or at least 100% of the total tax on your previous year’s return you most likely will not need to make estimated tax payments.
• You must withhold 110% of the total tax on your previous year’s return if your AGI is greater than $75,000 for single filers and $150,000 for married filing joint.
• If you don’t calculate your estimated payments until after April 15, when the first quarterly payment is typically due, then you will need to make your payments as soon as you can to “catch up.”

Who Does Not Have To Pay Estimated Tax? #

If you receive a salary, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings. To do this, file a new Form W-4 with your employer. There is a special line on Form W-4 for you to enter the additional amount you want your employer to withhold.

You don’t have to pay estimated tax for the current year if you meet all three of the following conditions.

• You had no tax liability for the prior year. In other words, if your total tax was zero or you didn’t have to file an income tax return.
• You were a U.S. citizen or resident for the whole year
• Your prior tax year covered a 12-month period

How Do I Calculate the Estimated Tax? #

Individuals, including sole proprietors, partners, and S corporation shareholders, generally use Form 1040-ES, to figure estimated tax. To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.

When Do I Have Pay Estimated Taxes? #

Estimated tax payments are due as follows:

• Q1 | is due April 15 for the period covering Jan 1 to Mar 31
• Q2 | is due June 15 for the period covering Apr 1 to May 31
• Q3 | is due September 15 for the period covering Jun 1 to Aug 31
• Q4 | is due January 15 of the following year for the period covering Sep 1 to Dec 31

How Do I Pay Estimated Taxes to the Federal Government (IRS)? #

You can pay online on the IRS Website.

Create an account on the IRS Website and click “Go to Your Account”

What you need:

1. A prior year federal and state tax return handy to verify your identity.
2. A bank account number and routing number.

What is the Penalty for Underpayment of Estimated Tax #

If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they:

• Owe less than $1,000 in tax after subtracting their withholdings and credits, OR
• if they paid at least 90% of the tax for the current year, or
• 100% of the tax shown on the return for the prior year, whichever is smaller

If the Adjusted Gross Income (AGI) on your previous year’s return is over $150,000 (over $75,000 if you are married filing separately), you must pay the lower of:

• 90% of the tax shown on the current year’s return or
• 110% of the tax shown on the return for the previous year.