A lot of tax issues are incredibly complicated, but this one isn’t. We’re happy to give you straightforward answers to your estimated tax questions in plain English. After we spend a little time together, you’ll know exactly what an estimated tax payment is, who needs to make them and how they do it.

What are Estimated Tax Payments?

You may have heard us mention before that the federal income tax is a pay-as-you-go tax. As the name implies, this means that you pay your taxes as you earn income. This is why your employer withholds federal taxes from your paycheck every week.

The pay-as-you-go system benefits everyone. The IRS gets your money to play with throughout the year and you avoid getting a hefty tax bill in April when you file your taxes.

Self-employed people, however, don’t have an employer to withhold taxes for them. As such, they must calculate how much tax they think they’ll owe at tax time and make payments throughout the year. Because these payments are based on how much money the person expects to make, the tax payments are estimated.

Do I Need to Pay Estimated Tax Payments?

As we’ve mentioned, self-employed individuals often have to make quarterly estimated tax payments. There are other taxpayers, too, who may need to do the same. If you expect your investments to perform well, they could generate enough taxable income to require estimated payments. You may also need to make estimated payments if you received income as a landlord.

In general, you’ll need to make estimated payments if you meet any of the following conditions:

  • You expect to owe more than $1,00 in taxes when you file
  • The taxes withheld from your income will cover less than 90 percent of your expected tax bill
  • Taxes being withheld from your paycheck (or other sources of income) will total less than your tax liability from last year (This condition applies to the Safe Harbor Rule which we’ll talk about later.)

When to Pay Estimated Quarterly Taxes

If you have to make estimated payments for your federal tax, there are deadlines for making them. The IRS breaks the calendar year into quarters. You’re estimated tax payments are due on the fifteenth of the month following a quarter’s end. Generally, each payment is for the same amount, but that’s not awlays the case.

January, February and March comprise the first quarter of the year. Estimated tax payments for this quarter are due April 15. The next quarter covers April, May and June, with the tax payment coming due July 15. As you’ve probably guessed, July, August and September make up the third quarter of the year and your tax payment is due on October 15.

The final quarter of the year is October, November and December. Don’t let the end of the calendar year throw you. The rules stay the same. The estimated tax payment is still due on the fifteenth of the following month. Your estimated payment for the final quarter of 2020, for instance, is due January 15, 2021.

Do You Have to Pay Estimated Taxes Quarterly?

Pay Estimated Taxes Quarterly

Technically, the IRS expects you to make your estimated tax payments quarterly and requires you to do so. There are, however, times when it’s acceptable to do things a little differently.

Let’s say that you work as a freelancer. You’re having a slow year so you haven’t been making estimated tax payments. You unexpectedly land a massive job in the third quarter of the year, however, that completely changed your tax picture. In this case, you can begin making estimated tax payments in the third quarter even though you didn’t need to do so before. You’ll end up making two estimated tax payments rather than four.

Note also that there is no wrong time to make a payment. If you’re required to make payments, you’re required to send them by the due dates. The IRS won’t penalize you for paying early, however.

Again, an example is the best way to illustrate our point. Pretend you’re still freelancing and not making estimated tax payments. You land a huge job in July and the client pays you a large deposit in August. If this deposit is large enough to cover your estimated tax payment now due in October, you can go ahead and make the payment now (in August)if you wish. Rest assured the IRS will never refuse to take your money.

They do, however, have a document slip through the cracks now and then. This is rare, but it does happen. Protect yourself by keeping records of every tax payment you make throughout the year.

4-Step Guide to Calculating Your Estimated Taxes

For some of us, high school algebra was a long time ago. Luckily, you need only basic math to calculate how much your estimated tax payments should be. The calculations aren’t complicated at all and you can calculate your payments in four easy steps.

Step 1: Determine Your Taxable Income

Estimate how much money you expect to earn over the course of the year. If you’re not sure, you can use last year’s gross income as a guide. Once you’ve determined how much you expect to make, subtract the standard deduction from your total estimated income. This number is your taxable income.

Step 2: Calculate Your Income Tax

Now that you know how much of your income is taxable, you’ll need to figure out how much tax you’ll have to pay. Tax rates change every year, however, so make sure you’re working with the most recent information. The IRS website can help you determine your tax bracket. IRS Publication 505 contains the specific information you’ll need. Find your tax bracket and then calculate your total expected tax obligation.

Step 3: Calculate Self-Employment Tax

If you’re self-employed, you may owe self-employment tax on top of other taxes. To calculate your tax, multiply the amount of your self employment income by 92.35%. Multiply that number by 15.3%. This is the amount of your self employment tax.

Step 4: Add it Up and Divide by four.

Add together you’re tax liability from step 2 and your self-employment tax, if applicable, from step 3. This is your total estimated tax for the year. Divide it by four to determine how much each of your quarterly payments will be.

The “Safe Harbor” Rule of Estimated Tax Payments

If all this calculating feels like too much bother, or if you truly have no idea what your income picture will look like this year, consider using the Safe Harbor Rule. To do so, just grab your tax return from last year and take a look at how much tax you paid. You’re covered if you pay the same amount again.

If, for example, your tax obligation last year was $5,000, make $5,000 worth of estimated payments this year. If you do, the IRS won’t come after you, even if you end up owing more this year. If you pay $5,000 under the Safe Harbor Rule but end up with a $6,000 tax obligation, you can just pay the extra $1,000 when you file your taxes and may do so without penalty.

Things are just as easy if you overpay, too. If you owe less tax this year than you did last year, the IRS will refund your overpayment. You can choose to have this refund sent to you or apply it towards next year’s taxes.

If you make more than $150,00 per year, the rules change a bit for you. In this instance, you’ll need to pay 110% of last year’s taxes to use the Safe Harbor Rule.

How to Pay Estimated Quarterly Taxes

Paying your estimated tax is easy to do. You can simply mail IRS Form 1040-ES along with a check or make a payment online at the IRS website through a credit card or direct daft. If you opt to mail the paper form, you’ll find the correct address listed in the instructions of your Form 1040-ES form.

What if I Don’t Pay?

late tax payment

The IRS doesn’t tend to take no for an answer. You can pay them now or you can pay them later — and if you opt for later, you’re going to pay more. If you owe estimated tax payments, it’s important to make them and to make them on time.

If you ignore your estimated tax obligation, the IRS will charge you fees and penalties when you file your return. How much these fees amount to depends on how much you owe. The IRS will expect you to pay your original tax liability and any fees when you file your income tax return at the end of the year.

Calculating and paying estimated taxes is usually a simple process, but everyone’s tax picture looks a little different. If you have special circumstances or just need a little more help understanding estimated tax, the professionals at Picnic Tax are here to help. Our friendly accountants will be happy to help you determine if you need to make estimated tax payments and figure out how much these payments need to be. We don’t believe frustrated tax payers should be left to go it alone and are happy to share our knowledge with you.