Estimated Tax Payments
It is important to make your estimated tax payments on time. We will cover who needs to pay, how to determine the amount, and the steps to submit the payment.
Estimated Tax Liability :
"Estimated tax is the method used to pay tax on income that isn’t subject to withholding (for example, earnings from self-employment, interest, dividends, rents, alimony, etc.). In addition, if you don’t elect voluntary withholding, you should make estimated tax payments on other taxable income, such as unemployment compensation and the taxable part of your social security benefits." Source: Internal Revenue Service - (https://www.irs.gov/pub/irs-pdf/f1040es.pdf)
Need help?
In this section, you can address common questions efficiently.
Who needs to pay?
Individuals, including sole proprietors, partners, and S corporation shareholders, generally need to pay estimated taxes if they expect to owe at least $1,000 in tax after subtracting withholding and refundable credits. Corporations must pay if they expect to owe $500 or more. Estimated taxes are required if your income isn’t subject to regular withholding, such as earnings from self-employment, interest, dividends, rent, or capital gains.
When Are Estimated Taxes Due?
Estimated tax payments are typically made quarterly. The due dates are:
- April 15 (for income earned January 1–March 31)
- June 15 (for income earned April 1–May 31)
- September 15 (for income earned June 1–August 31)
- January 15 of the following year (for income earned September 1–December 31).
How to Calculate Estimated Taxes
You calculate your estimated tax by adding up all your expected taxable income, deductions, and credits for the year. Use Form 1040-ES to estimate your total tax liability. Divide the total by four (for quarterly payments) or adjust based on income variations throughout the year. The IRS recommends using the "safe harbor" rule, paying 100% of the prior year's tax liability (110% if your adjusted gross income exceeds $150,000) to avoid penalties.
Which Form to Use
Use Form 1040-ES for individuals to calculate and pay estimated taxes. Corporations use Form 1120-S for their calculations. Payments can be made online through the IRS Direct Pay system, by mail using the payment vouchers included with Form 1040-ES, or through the Electronic Federal Tax Payment System (EFTPS).
Penalties for Underpayment of Estimated Taxes
If you underpay your estimated taxes, the IRS may impose penalties, even if you are due a refund when you file your return. Here's an overview:
- Penalty Calculation:
- The penalty is calculated based on the amount of the underpayment, the period it was underpaid, and the IRS interest rate for underpayments (which changes quarterly).
- Safe Harbor Rules to Avoid Penalty:
- You can avoid penalties if you pay at least:
- 90% of the current year’s total tax liability, or
- 100% of the prior year’s total tax liability (110% if your prior year’s adjusted gross income was over $150,000).
- You can avoid penalties if you pay at least:
Estimated Taxes
Reach out to us to ensure that your estimated taxes are filed on time and in the correct amounts.
Disclaimer
This information about estimated taxes is provided for general informational purposes only. It should not be relied upon as tax advice for your specific situation. Tax laws and regulations can be complex and subject to change. For personalized guidance tailored to your unique circumstances, please consult a qualified tax professional, such as the experts at www.mtbcpa.us.
IRS Additional information about Estimated Taxes
Check out the link below for comprehensive information on who is required to file estimated taxes, the process for filing, deadlines for submission, the forms needed for filing estimated taxes, payment options available, penalties for failing to pay or underestimating taxes, and guidance on filling out related forms, as well as answers to common questions regarding estimated taxes.
https://www.irs.gov/faqs/estimated-tax