Estimated tax payments: How they work and when to pay them
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When you’re paid a regular salary, your employer makes sure Uncle Sam gets his cut with each paycheck you get by withholding taxes and sending it to the IRS. But if you’re self-employed or get non-wage income, you’ll most likely have to set aside some money and pay estimated taxes four times a year.
What are estimated taxes?
Income unaffected by federal tax withholding throughout the year is still subject to other tax payments. These payments are kept track of and paid through estimated taxes, which must be paid as income is earned during the year.
However, taxpayers are sometimes able to get around making payments by having more taxes withheld from their paychecks. Penalties and interest generally apply for underpayments and late payments.
Examples of income not normally subject to tax withholding include:
- Capital gains.
- Self-employment earnings.
- Gig economy earnings.
- Unemployment compensation.
- Social Security benefits in some cases.
The IRS wants Americans to pay taxes as they earn money. Normally, penalties and interest apply for underpayments and late payments.
Because of the pandemic in 2020, some tax filing deadlines were relaxed and extended. Similarly, interest and penalties were waived and didn’t begin accruing until mid-July.
“Keep in mind that due to COVID-19 the 1040 returns for 2019 were moved from being due on April 15 to July 15,” says Judy O’Connor of accounting firm O’Connor & Rodriguez, PA, in Miami Shores, Florida. “And then due to COVID the first two quarterly payments for estimated taxes were moved from April 15 and June 15 to July 15.”
But “as of now,” no changes are planned for the 2021 tax year due to the pandemic, she adds. But that could change. “There is so much up in the air still with COVID-19, and there could be changes once again.”
Who should pay estimated taxes?
If you expect to owe more than $1,000 in additional taxes after calculating your withholding and refundable credits for the year, the IRS says you must pay estimated taxes. Note that special rules apply for farmers and fishermen.
The IRS, however, offers safe harbor guidelines to help you avoid underpayment penalties. For example, you’re in the clear if your withholdings pay 90 percent of the tax bill you’ll owe for 2021. But if you have no idea how much you’ll earn next year, you can pay 100 percent of your 2020 tax bill to protect yourself from owing penalties and interest.
When are estimated taxes due?
Upcoming estimated tax filing deadlines are as follows:
|Estimated tax due:||For income received:|
|Jan. 15, 2021||Sept. 1 – Dec. 31, 2020|
|April 15, 2021||Jan. 1 – March 31, 2021|
|June 15, 2021||April 1 – May 31, 2021|
|Sept. 15, 2021||June 1 – Aug. 31, 2021|
|Jan. 18, 2022||Sept. 1 – Dec. 31, 2021|
The fourth-quarter deadline is always in the January of the following year.
Normally, the estimated tax deadline falls on the 15th of the month. When this date falls on a weekend or federal holiday, the 1040-ES filing deadline is pushed to the following business day. This occurs in 2022, when Jan. 15 falls on a Saturday, followed by Martin Luther King Jr. Day on Monday, Jan. 17. So the tax deadline for income earned in the fourth quarter of 2021 is Tuesday, Jan. 18, 2022.
How to determine what you should pay
Form 1040-ES helps you figure your estimated taxes and provides vouchers to send along with your estimated tax amounts if you opt to pay by check or money order. Tax preparation software or your accountant can do the calculations for you. To determine how much you owe, check the income claimed and deductions taken on the previous year’s federal tax return to see if it will be comparable in the current year.
Don’t forget to check if you’ve applied your previous year’s tax refund to this year’s taxes.
High earners, defined as those making $150,000 or more if single or married filing jointly ($75,000 if married filing separately), should pay 110 percent of last year’s tax liability to meet safe harbor rules.
Example: If your tax bill last year was $30,000, this year you would pay $33,000 (10 percent more) in estimated and withholding taxes to avoid paying any underpayment penalties.
How to pay estimated taxes
Ideally, the IRS would like to get your estimated taxes in four equal payments over the course of the year, but some businesses are seasonal. For example, a landscaping business makes most of its money during the warmer months of the year. It’s wise to pay the tax as you get income. In this event, you’d follow the annualized income installment method that enables you to pay when you’re flush with cash. Instructions can be found in IRS Publication 505, Tax Withholding and Estimated Tax and Form 2210.
Once you determine the amount to pay, the IRS will accept your money in any number of ways. Instructions for payment can be found at IRS.gov/payments. Methods of payment include:
- Direct pay from your checking or savings account.
- The IRS2Go mobile app (IRS2Go is available in the App Store or on Google Play.)
- Payment with debit or credit card.
- Use of the Electronic Federal Tax Payment System.
- Same-day wire through your bank.
- Cash at a participating retail establishment.
If you pay online, which you can do any time of the year, be sure to select the tax year and tax type or form associated with your payment. If you pay by check or money order, send the payment along with a Form 1040-ES voucher to the address specified for your state or territory on that form. Make the check out to the United States Treasury, and in the notes section in the lower left corner, specify the tax year and “estimated taxes.” Regardless of how you pay, it is important to be thorough and make sure the information you provide is accurate.
Taxpayers who live in places subject to natural disasters should note that changes are subject to be made regarding the quarterly due dates for estimated tax payments. A list of applicable declared disaster situations can be found on the IRS website.