Anyone whose taxes are not sufficiently withheld, or anyone who has income that is not subject to withholding taxes are liable to make estimated tax payments. A payment made towards your taxes from an estimate you have made about your earnings for the year is an estimated tax payment. Failure to complete these payments will result in interest penalties.
Estimated interest payments are well known in the self-employed world, but are not the only ones who are responsible to make them. If you have income from:
you may also be required to pay either estimated taxes or an underpayment penalty. Others subject to making estimated payments are individuals who must pay special taxes such as the 3.8% tax on net investment income or the employment tax on household employees.
The “quarterly” estimate periods do not always coincide with a calendar quarter. Here is the quarterly calendar:
|January through March
|April and May
|June through August
|September through December
* If the due date falls on a Saturday, Sunday, or holiday, the payment is due on the next business day.
An underestimate penalty does not apply if the tax due on a return (after withholding and refundable credits) is less than $1,000. This is the “de minimis amount due” exception. Underpayment penalties are assessed when tax due is $1,000 or more.
An underpayment in an early quarter cannot be made up for in a later quarter. Underpayment penalties are determined on a quarterly basis. An overpayment in an earlier quarter is applied to the following quarter.
The amount of an estimated payment is determined by estimating one fourth of the taxpayer’s tax for the entire year. The projected tax is paid in four installments. When the income is seasonal, sporadic, or the result of a windfall, the IRS provides a special form. The underpayment penalty is based on actual income for the period.
For individuals who do not want to take the time to estimate their quarterly taxes but who still want to avoid the underpayment penalty, there is the option of safe-harbor estimates. You can avoid an underpayment penalty if your withholding and estimated payments are equal to or greater than:
However, these safe harbors do not apply if the prior year’s adjusted gross income is over $150,000, in which case, the safe harbors are
If you have withholding on some, but not all, of your sources of income, you can increase the amount withheld. This will compensate for the additional income sources that don’t have withholding. Withholding adjustments are not as precise as quarterly payments and should be used with caution.
If you have questions about your specific tax payment situation, we would love to help you navigate it. Contact us for assistance!