Estimated Tax Payments: What to Pay and When

Estimated tax payments can be confusing, but they don’t have to be. Understanding the basics of estimated taxes and what you need to pay is key to making sure you stay in compliance with the IRS.

Keeping up with estimated taxes throughout the year will help you avoid paying too much (or too little) come tax day. In this article, we’ll discuss when estimated taxes are due as well as how much you’re required to pay.

Estimated tax payments are regular payments that individuals or businesses make to the government throughout the year to cover their anticipated tax liability.

These payments are typically made quarterly in four equal installments and are estimated based on an individual’s or business’s expected income not subject to federal tax withholding minus deductions for the current year.

Estimated tax payments are used to ensure that the tax owed is paid in a timely manner rather than as a lump sum at the end of the year, avoiding underpayment penalties.

Who should make quarterly estimated tax payments?

The Internal Revenue Service mandates that specific taxpayers make estimated tax payments on a quarterly basis to guarantee they contribute their fair share of taxes throughout the year. Below are the various categories of taxpayers obligated to pay estimated taxes:

• Self-Employed Individuals: If you are self-employed or run a sole proprietorship, you are required to make estimated tax payments if you expect to owe $1,000 or more in taxes for the year.
• Small Business Owners: Owners of small businesses, including S corporations, partnerships, and limited liability companies (LLCs), are required to make estimated tax payments if they expect to owe $1,000 or more in taxes for the year.
• Investors: Investors earning income from dividends, rental properties, capital gains, and other sources are required to make estimated tax payments if they anticipate owing $1,000 or more in taxes for the year.
• High-Income Taxpayers: Individuals with high incomes, such as those earning salaries, bonuses, and other taxable income, may need to make estimated tax payments to both state and federal authorities if they anticipate owing $1,000 or more in taxes for the year.

When are estimated tax payments not required?

Many businesses must make estimated quarterly tax payments during the year. However, there are specific situations in which estimated tax payments are not required. These situations include if a business:

• is expected to owe $1,000 or less for the year in taxes
• has zero income for a particular quarter
• was not operational for the full taxable year
• filed and paid their taxes on time for the previous year

How do you calculate estimated tax payments?

It’s important to calculate your estimated tax payments accurately to avoid underpayment penalties and interest charges from the IRS. There are two methods for calculating estimated tax payments: the annualized income installment method and the prior year safe harbor method.

The Safe Harbor Method

The safe harbor method provides a straightforward approach to calculating estimated tax payments and can help prevent penalties for underpayment. To utilize this method, take the lesser of either 90% of the current year’s total tax liability or 100% of the total tax liability from the previous year. Additionally, remember to include any credits claimed during the taxable period when calculating estimated tax payments.

The Annualized Income Installment Method

The annualized income installment method is more complicated than the safe harbor option but allows taxpayers to better account for any changes in income during their taxable period. With this approach, make four separate calculations at equal intervals during your taxable period. These calculations should include all sources of taxed income, credits awarded, and deductions made during each portion of your taxable period to accurately determine what amount needs to be paid for that quarter.

What are the quarterly tax dates?

Paying taxes can be a tricky process, especially when dealing with quarterly estimated tax payments. There are four different deadlines for estimated taxes throughout the calendar. Knowing these deadlines will help ensure that you pay your taxes on time and avoid any potential penalties. Here is an overview of the quarterly estimated tax payment deadlines:

• First estimated tax payment due
• Second quarter estimated tax payment due
• Third quarter estimated tax payment due
• Fourth quarter estimated tax payment due

How do you make an estimated tax payment?

Making estimated tax payments is a crucial step in avoiding underpayment penalties and interest charges from the IRS. Here are the steps to make an estimated tax payment:

Determine your estimated tax liability

The initial step in making estimated tax payments is to assess your anticipated tax liability for the year. You can calculate your estimated tax payments using one of two methods: the annualized income installment method or the prior year safe harbor method, to establish your estimated tax liability.

Choose a payment method

Once you have determined your estimated tax liability, you need to choose a payment method to make your estimated tax payment. You can make estimated tax payments online, by mail, or through a bank or financial institution.

Make your payment

After choosing your payment method, you can make your estimated tax payment. Be sure to include your business name, Employer Identification Number (EIN), and the tax year and quarter for which you are making the payment. If you are making a payment for a sole proprietorship, be sure to include your name and Social Security Number instead of a business name and EIN.

Keep a record of your payment

It’s important to keep a record of your estimated tax payment, including the date, amount, and method of payment, to ensure that you have proof of payment in case of any issues or questions from the IRS.

What happens if a business doesn’t make estimated tax payments?

If a business neglects to make estimated tax payments, the IRS may impose penalties for underpayment and charge interest on the outstanding amount. The longer the income tax goes unpaid, the greater the estimated tax penalty and the interest that will accumulate. This situation can lead to additional consequences such as tax liens, wage garnishments, bank levies, and asset seizures. To prevent these issues, it is crucial to ensure that estimated tax payments are made accurately and on time, ideally with the assistance of a tax professional.

Do you have to pay estimated taxes quarterly?

Estimate taxes are generally due on a quarterly basis. This means that estimated taxes must be paid four times each year – on the 15th of the fourth month (for Q1), the 17th of the sixth month (for Q2), the 16th of the ninth month (for Q3), and the 15th of the first month of the following year (for Q4). Taxpayers may also choose to make advance payments in order to reduce their tax burden at the end of the year.

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This article, "Estimated Tax Payments: What to Pay and When" was first published on Small Business Trends