Estimated tax payments: What they are and how to pay them

Estimated tax payments: What they are and how to pay them

Estimated taxes are quarterly payments and are important for certain individuals to avoid penalties for tax underpayment. If you owe estimated taxes, it’s important to understand why you owe them, how much you owe, and to pay them on time. We’ve put together a guide to better understand them.

What is an estimated payment for taxes?

Quarterly estimated tax payments are income taxes that are paid throughout the year by individuals who either don’t withhold enough taxes from their income or earn income from sources like interest, dividends, capital gains, prizes and awards, or self employment income from which taxes are not withheld at all. 

Estimated tax payments are not just for income tax, however, but are also used to pay taxes including self-employment tax and alternative minimum tax.

What are the due dates for estimated tax payments?

For federal taxes, estimated tax payments are due based on quarterly periods. These periods and their associated due dates are:

  • January 1 to March 31; due April 15

  • April 1 to May 31; due June 15

  • June 1 to August 31; due September 15

  • September 1 to December 31; due January 15 of the following year

If these due dates fall on a weekend or federal holiday, payments are due the next business day.

Do I need to pay estimated taxes?

Whether you need to pay estimated taxes typically depends on the source or sources of your income. Generally, those that need to pay quarterly estimated taxes are those who don’t have taxes withheld from their paychecks. This will usually include freelancers, small business owners, or independent contractors.

According to the IRS, individuals who expect to owe tax of $1,000 or more when they file their tax return may have under-withheld and must pay estimated tax.

What happens if you don't pay estimated taxes?

If you have to pay estimated taxes and don’t pay enough by the due date for each payment period, you may be charged a penalty — regardless of whether you’re due a refund when you file your tax return.

How do I avoid tax prepayment penalty?

In order to avoid tax prepayment penalties, you should make sure to submit quarterly estimated taxes before their respective due dates.

I need help calculating estimated taxes. How much do I owe?

According to the IRS, your estimated tax is based on your “expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.” If you need help calculating estimated taxes, you should use Form 1040-ES.

Can you pay estimated taxes to the IRS online?

Yes, you can pay estimated taxes online. In fact, the IRS accepts estimated tax payments in a variety of ways. Estimated tax payments can be submitted by mail using Form 1040-ES, online through the IRS website, or by mobile device with the IRS2Go app.

Will I owe a penalty for underpaid estimated tax?

In cases where you don’t pay enough tax during the year, whether by way of withholding on your paycheck or quarterly estimated tax payments, you may owe a penalty for underpayment of estimated tax.

According to this IRS, this penalty is typically avoided by taxpayers who fall into one of the following categories:

  • they owe less than $1,000 in tax after subtracting their withholdings and credits

  • they paid at least 90% of the tax for the current year or 100% of the tax shown on the prior year’s return, wherever is smaller

Special rules apply for fishermen, farmers, and certain higher income taxpayers. The IRS also may waive penalties for other reasons detailed on their website.

How to prepare to pay estimated tax payments

Once you’re done calculating estimated taxes for each quarter, one way of preparing for these payments is to divide this amount by 13 and set aside that amount each week throughout the quarter. Storing this money in a high-yield savings account or money market deposit account can be a great way to keep the money protected by federal deposit insurance while growing at a great interest rate. Then, when it’s time to pay estimated taxes online, you can withdraw the necessary amount and submit to the IRS.

If your finances allow, another way you could prepare to pay estimated tax payments is to set aside the total amount you expect to owe for the next year as soon as possible. Then, set aside each quarter’s payment in a high-yield CD that will mature in time for each due date. For instance, if you’re setting aside money in April, you may want a one-month CD to line up with the payment due in June, a five-month CD to line up with the payment due in September, and a nine-month CD to line up with the payment due in January.

For a complete guide on how to prepare for pay estimated tax payments, click the button below.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

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