04 Jun Estimated Tax Payments: Who, When, and How Much?
For individuals who work as W2 employees and have adequate taxes withheld from their paychecks, paying taxes isn’t really something you need to think about until you file a return at the beginning of the year. But if you have any sources of income that are not taxed upfront, you should be thinking about paying your taxes throughout the year. The IRS expects to receive your tax payments as you earn your money, which means making estimated payments on a regular basis.
If you think you might be in this boat, here’s what you need to know about making estimated payments.
Who Needs to Pay?
As mentioned above, anyone with a source of income that is not taxed upfront should be making estimated payments. This includes:
- Sole proprietors or partners in a business
- S-corporation shareholders
- Freelance or contract workers
- Individuals receiving income from stock dividends
Other individuals may also have to make estimated payments, so if you’re not sure whether or not this applies to you, speak to one of our tax experts in Provo.
When Do You Pay?
Estimated payments should be made four times a year. However, the payment dates don’t align with traditional calendar quarters. The deadlines for quarterly estimated payments are as follows:
- For income earned January 1 through March 31: April 15
- For income earned April 1 through May 31: June 15
- For income earned June 1 through Aug 31: September 15
- For income earned September 1 through December 31: January 15
You should make your estimated tax payments on these dates, based on the amount of untaxed income you received in the corresponding date range. However, if your income is received primarily in one quarter (such as with stock dividends paid out at the end of the year), you can simply make your estimated payment at that time, as you are not required to make estimated payments until you’ve received untaxed income.
How Much Do You Pay?
Often, knowing just how much to pay for your estimated tax payments is a bit of a challenge. Many sources of untaxed income fluctuate throughout the year. (Such as a business owner whose business earns substantially higher profits in the first quarter than throughout the rest of the year.) These changes in your earnings can alter which tax bracket you fall in, and cause confusion and complications with calculating your estimated payments.
The IRS recommends that you calculate your quarterly payments by first calculating your total estimated tax for the year, then dividing it by four and sending in equal payments according to the schedule above. The best way to do this is to provide estimated income amounts to your CPA at The Accounting Guys and we will calculate what should be paid in. However, if you expect your income to be similar from year to year, you may be able to look at your 1040 from the previous year to see the “total tax” entry. Take this number, and deduct any withholdings you expect to have. This will give you your estimated tax payments for the year. Just divide that by four to figure out what you should pay every quarter. Keep in mind that a new tax law came into effect for 2018, so this may not be as accurate as in prior years.
Of course, the amount you owe this year isn’t likely to be exactly the same as the previous year. However, this method works fairly well because the IRS considers you to be compliant with paying your taxes as long as you have paid at least 90% of the taxes you owed, or a “safe harbor” payment, which is based on a percentage of the tax you owed last year; this refers to a regulation that protects you from any penalties relating to income tax underpayment, so long as you acted in good faith and made reasonable estimated payments.
It’s extremely important that you make regular estimated payments if you receive any untaxed income throughout the year. If you don’t, and you owe more than $1,000 at the time that you file your tax return (or more than $500 for corporations), you may be subject to penalties and fees for underpayment. So, if you receive untaxed income, and you need assistance calculating your estimated payments, reach out to The Accounting Guys to speak to tax experts in Provo, and get the help you need.