Tax FAQ Series – All About Estimated Tax Payments
What are Estimated Tax Payments?
Let’s start with what they’re not. If you receive a W-2 wage from your employer or pay yourself a W-2 wage from your own business, there will likely be taxes withheld from your paycheck. Usually this includes Social Security Tax, Medicare Tax and Income Tax in addition to any applicable State Taxes. These are NOT estimated payments. They are tax withholdings by the employer that are then sent to the IRS and state taxing agencies.
Estimated Tax Payments are payments you make separate from the taxes withheld from any W-2 income based on your estimate of what you believe you’ll owe in taxes by the end of the tax year. The deadline for making these periodic payments is April 15th, June 15th, September 15th, and January 15th – yes, that’s correct, and no, they’re not exactly quarters but they’re still sometimes referred to as “quarterly” payments.
Can’t I just pay my taxes when I file my return?
Yes, you can. But there may be a “late payment” penalty. Why? Because under current tax law, taxes are to be paid as the income is earned, not just at the end of the year when the return is filed. If you receive income as a W-2 employee and have done a good job setting your exemptions and deductions with your employer, then taxes will be withheld each time you receive a paycheck. But if you receive income from other sources (investments, real estate sales, self-employment) then you’ll probably need to estimate your income and make estimated tax payments through the year, so you’ve paid your tax bill by the end of the year – January 15th following the end of the tax year is the payment deadline.
And you don’t have to be exactly right when it comes to the amount you’ve paid. The IRS allows you to be “close” by the end of the year then you can pay the remaining difference by April 15th. The rules for late payment are much more complex than this, but generally speaking, if you’ve paid within 10% of what’s ultimately owed then you’re “close” enough and there won’t be a penalty so long as you pay the remaining balance by April 15th.
How do I estimate the tax I’ll owe?
Estimating taxes begins with estimating your income. Look at all potential sources of income you expect to receive during the year. Then determine all deductions and exemptions, including any costs of generating the income received (so long as the expenses/costs are deductible). The difference will be an estimate of your Adjusted Gross Income. Then subtract any other allowable reductions in income (contributions to retirement plans, cost of self-employed health insurance, student loan interest, etc.) What’s left is an estimate of your taxable income. Now look at the tax tables to determine your tax bracket and corresponding tax rate. Multiply your estimated taxable income by the tax rate and you’ll have an estimate of your tax liability. If you have sources of income (like W-2 wages) that already withhold income tax, subtract the withholding amount from your estimated tax liability. Then divide what’s left by four (and add a little to be conservative). The result will be the estimated tax payment you’ll want to make on each of the deadline dates (April 15th, June 15th, September 15th, and January 15th).
We can also provide a tax estimate analysis if you need assistance.
Here’s a link to a Tax Withholding Calculator provided by the IRS that may help:
And here’s a link to the details the IRS provides regarding Estimated Taxes that may also be helpful:
How do I pay my estimated taxes?
The best way is to pay the federal estimated amount is using the online system. Here’s the link: https://www.irs.gov/payments. Each state also has an online system – just do an internet search to locate the specific links. You can also mail the payment – make sure you use a payment voucher when you do so and write your name, tax ID number and the tax year the payment is to be used for on the check. And if you do mail a payment, always send the payment using a carrier that allows you to track and confirm delivery.
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