Should you be making Estimated Tax Payments??

Estimated tax is looking back at your earnings from a set prior period and paying tax on that income, which is generally not subject to withholding (think 1099 contractor/ self employed) or when it is subject to withholdings and too little taxes are withheld.

Because taxes were not withheld you are responsible for submitting a tax payment for them during the year. Our tax system is a pay as you go system and therefore estimated taxes are divided into four payment periods with a due date for each period. If you don’t pay enough tax by the due date of each period, you could be charged a penalty. This can happen even if you are due a refund when you file your taxes at the end of the year. Crazy, right?!?!?

What a lot of people don’t understand is you could have taxes withheld from the income you receive from your “day job” and still be on the hook for estimated taxes. If your withholdings don’t cover your tax liability for the year you might need to make estimated tax payments.

For example, if you owed more than $1,000 in taxes last year, you probably didn’t have enough taxes withheld from your paychecks or you didn’t pay tax on the items mentioned above and this could be an indicator that you need to pay estimated taxes this year. This is especially true if you haven’t changed your withholding rate.

If you are still confused about whether this pertains to you ask yourself the following questions:

  1. Do you expect to owe less than $1,000 in taxes for the tax year after applying withholdings? If you answered yes, then you don't need to make estimated tax payments.

  2. Do you expect your federal income tax withholding to be at least 90 percent of the tax that you will owe for this tax year? If you answered yes, then you don't need to make estimated tax payments.

  3. Do you expect that your income tax withholding will be at least 100 percent of the tax on your previous year's return? Or, if your adjusted gross income (AGI) on your previous tax return was over $150,000 ($75,000 if you're married and file separately), do you expect that your income tax withholding will be at least 110 percent of the tax you owed in tax for the previous year? If you answered yes, then you don’t need to make estimated tax payments.

If you answered "no" to these questions, you must make estimated tax payments.

When are quarterly estimated tax payments due? The year is divided into four periods for estimated taxes, with the periods covered and their corresponding due dates (see the chart).

Period Covered Payment Due Date

January 1 – March 31 April 15 April 1 – May 31 June 15 June 1 – August 31 September 15 September 1 – December 31 January 15

How do I determine what I owe? Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay any estimated tax.

Ways to Pay:

If you have found yourself owing estimated taxes you have three options to pay your tax bill and they are:

To pay using your checking or savings account go directly to the IRS Direct Pay page. Using this option, you can make payments up to 8pm Eastern time on the due date of the estimated payment. There are no processing fees for this option, but be aware that the page can be down for maintenance at any time, so don’t wait until the last minute as the IRS doesn’t see this as a valid excuse for your payment being late.

A second option is to pay by a credit or a debit card on the IRS webpage. With this option, you can make payments up to midnight on the due date. There are a few different options for processors on the site and they all charge convenience fees.

A third option is to mail your estimated tax payment in to the IRS using Form 1040-ES. If using this option note that the date of the U.S. postmark must be on or before the due date. The IRS will generally consider the payment to be made on time under this general rule.

When should I change my withholdings or estimated taxes? Usually if you have a major life change (i.e. birth of a child, marriage, additional job, etc.) You should change your withholdings or estimated taxes. If you are an employee, you may need to change the amount of tax withheld from your pay by providing your employer with a new Form W–4, Employee's Withholding Allowance Certificate. If you need help filling out this form you can contact me or use the IRS Withholding Calculator tool at IRS.gov.

IRS Resources:

Publication 505, Tax Withholding and Estimated Tax

Estimated Tax – frequently asked Q & As

Tax Topic 306 – Penalty for Underpayment of Estimated Tax