Quarterly Estimated Tax Payments: A Guide to Income Tax
Do you owe the IRS each year when you file your federal income tax return? Do you receive income from sources other than a regular paycheck, like self-employment, side jobs, investment income, or rental property? If so, you may be required to make estimated tax payments to avoid penalties from the IRS.
Estimated taxes can be confusing. When are they due? How do you calculate how much to pay? What happens if you don’t pay enough? This comprehensive guide will explain everything you need to know about estimated tax payments. Read on to learn how to efficiently handle this important tax task.
Why quarterly estimated taxes matter?
The United States income tax system operates on a pay-as-you-earn basis. Ideally, sufficient taxes should be withheld from your regular paychecks or pension payments to cover your income tax liability for the year. However, if you have additional sources of income beyond your wages, you may need to make estimated tax payments or face consequences.
The IRS requires quarterly estimated payments if you expect to owe more than $1,000 when you file your tax return. This threshold drops to $500 for corporations. Self-employed individuals almost always need to make estimated payments since no taxes are withheld from their business income. Investors, landlords, and others whose income fluctuates also often get hit with estimated tax requirements.
Paying estimated taxes quarterly helps ensure you don’t get stuck owing a large sum every April 15th. It also prevents interest and penalty charges for underpayment from accruing throughout the year. Overall, estimated payments help keep you compliant and demonstrate good faith to the IRS.
Who must make estimated tax payments?
You definitely need to make estimated tax payments if:
- You are self-employed or have business income
- Income from sources like freelancing, investments, rental property, etc. is not subject to withholding
- You owed taxes in the previous year
- You expect to owe more than $1,000 when you file
However, you don’t have to pay estimated taxes if:
- You had zero tax liability last year
- You were a full-year resident alien last year
- Your annual income is fully subject to withholding
- You adjust your withholdings to cover what you’ll owe
When in doubt, use the estimated tax worksheet from IRS Form 1040-ES to calculate whether estimated taxes apply to your situation. It’s better to be safe than sorry when it comes to IRS penalties.
How to calculate your estimated taxes?
Figuring out how much to pay for estimated taxes can be tricky. First, grab your prior year federal tax return to estimate your income, deductions, and tax liability for the current year. Then, use IRS Form 1040-ES, which includes worksheets to calculate estimated taxes.
The steps are:
- Estimate your adjusted gross income (AGI) for the year.
- Calculate your expected taxable income and taxes owed.
- Subtract tax credits you plan to claim.
- Determine how much you expect to withhold from paychecks.
- Calculate how much remains to be paid through estimated tax payments.
Be sure to account for any life changes since last year that may affect your income, deductions, etc. It’s better to overestimate than underestimate here to avoid penalties. Re-run the calculations before each payment to refine your estimate.
2024 estimated taxes due date
For tax year 2024, estimated tax payments are due on the following dates:
- April 18, 2024
- June 15, 2024
- September 15, 2024
- January 16, 2025
Payments can be made early but not late. If the deadline falls on a weekend or holiday, payment must be made the last business day prior.
How to pay estimated taxes?
The IRS offers several options to pay quarterly taxes:
- Mail in Form 1040-ES with a check or money order
- Pay online through IRS Direct Pay or via EFTPS (Electronic Federal Tax Payment System)
- Use the IRS2Go mobile app
- Call the IRS to pay by debit or credit card
For convenience, you can schedule recurring estimated tax payments so the IRS automatically draws the amount you specify on the due dates. EFTPS also lets you view payment history and receive email reminders.
Corporations must use EFTPS for deposits. Individual taxpayers can benefit from using this free system as well. Just enroll online and link your bank account to schedule ACH debits on the dates and frequencies you select.
Penalty for underpayment
Failing to pay enough estimated taxes triggers an underpayment penalty when you file your return. The IRS charges interest on the amount you should have paid each quarter until the balance is settled.
You can avoid penalties if you:
- Owe less than $1,000 after withholding and credits
- Paid at least 90% of tax for the current year
- Paid 100% of the prior year’s tax bill (110% if high income)
If your income varies throughout the year, you may qualify to annualize income rather than make equal quarterly payments.
Use Form 2210 to calculate any penalty and check if you qualify for exceptions due to retirement, disability, casualty losses, or other circumstances. You may need to make up the shortfall with your current tax return to stop interest charges from growing.
Take control of your income taxes
Estimated tax payments empower you to take control of your tax situation. With a proactive approach, you can avoid surprises each April 15th and demonstrate good faith to the IRS when you pay taxes throughout the year. We hope this guide provides clarity and confidence for handling estimated taxes.
Remember, you have resources like IRS Publication 505 and reputable tax professionals to provide guidance along the way. For personalized tax advice with estimated tax payments or lowering what you’ll owe, contact H&S Accounting & Tax Services today. Our team stays up-to-date on the latest IRS rules and regulations to ensure you never miss a payment deadline or pay more than necessary.
