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Demystifying Estimated Tax Payments

Author: Joseph Brice

As you earn or receive income throughout the year, you must pay tax on that income through withholdings or estimated tax payments. Estimated tax payments are a quarterly payment based on a filer’s amount of earned income in that quarter.

The IRS states, “If the amount of income tax withheld from your salary or pension is not enough, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards, you may have to make estimated tax payments.” Generally, individuals need to make estimated tax payments if they anticipate owing tax of $1,000 or more when they file their return.

It is noteworthy that estimated tax payments can cover more than just income taxes. They can also be used to pay taxes such as self-employment tax and alternative minimum taxes as well.

Who should make estimated payments?

As mentioned earlier in the article, individuals should consider making estimated tax payments if they anticipate $1,000 or more when they file their return. For Business, if you expect to owe $500 in taxes you should consider making estimated tax payments. A variety of tax filer groups make estimated payments, including:

Individuals receiving a W2
-Sole proprietors or partners of a business
-S corporation shareholders
-Other types of individuals with certain activity

When you own a business, you typically need to pay estimated .

The majority of individuals that are required to pay quarterly payments are small business owners, freelancers, and independent contractors. This is because these individuals will not have taxes automatically withheld from their income, unlike people withholding from a W2 received from an employer.

What happens if I don’t pay enough tax?

If an individual does not pay enough tax throughout the year with withholdings and estimated tax payments, they could get charged an underpayment penalty. There could also be a penalty if the estimated tax payments were made late, even if the filer is due a refund.  

You can avoid an underpayment penalty by paying the IRS at least 90% of taxes due for the current tax year or 100% of the tax liability from the previous year, whichever is smaller. However, if an individual’s adjusted gross income on the past year’s tax return was greater than $150,000, then they will need to pay 110% of that amount. Certain taxpayers can also avoid this underpayment penalty if they expect to owe less than $1,000 of tax, after subtracting withholdings and credits.

Additionally, the IRS will waive the penalty under the certain conditions below:

  1. “You didn’t make a required payment because of a casualty event, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or”
  2. “You retired (after reaching age 62) or became disabled during the tax year or in the preceding tax year for which you should have made estimated payments, and the underpayment was due to reasonable cause and not willful neglect.”

How to figure out how much you owe?

When calculating the amount of estimated taxes, you need to calculate your expected adjusted gross income, taxes, deductions, and credits for the year.

It will likely be helpful to use your income, deductions, and credits from the past tax return as a guide to figuring out what you owe. Obviously it can also help to have the guidance of a friendly tax accounting service to help through this process.

When are estimated tax payments due?
For the period January 1st to March 31st : April 15th

For the period April 1st to May 31st : June 15th
For the period June 1st to August 31st: September 15th
For the period September 1st to December 31st: January 15th of the following year.

To learn more about this topic contact Kingsbery CPAs today.