What Are Estimated Tax Payments?
IRS expects taxes to be paid on income as it is earned, referred to as the pay-as-you-go system. Therefore, individuals with income that isn’t subject to withholding taxes make estimated tax payments to the Internal Revenue Service (IRS) every quarter. Self-Employed individuals and small business owners must plan, estimate, and pay taxes quarterly to the IRS and state government. Employed individuals may also have to pay estimated taxes if the income tax being withheld from their salary, pension, or other income is not enough. When done right, quarterly estimated taxes allow you to understand your finances better and avoid unpleasant tax season surprises. This guide will teach you all you need to know about paying estimated taxes correctly.
Benefits of Paying Estimated Taxes
Avoid Penalties
The IRS can charge penalties for not paying estimated taxes through the year, making late or insufficient payments. Make estimated tax payment to avoid penalties if you either:
- expect to owe more than $1,000 in taxes for the tax year after subtracting tax withholdings and credits (Businesses filing as a corporation generally have to make estimated tax payments if it expects it to owe tax of $500 or more for the tax year), or
- expect your tax withholding to amount to less than 90 percent of your tax liability for the current year to be collected through tax withholdings, or
- expect your income tax withholding to be less than 100 percent of your previous year’s tax liability (if your income was $150,000 ($75,000) the tax withholding must be at least 110 percent)
Don’t get surprised with a large tax bill
You won’t be surprised with a hefty tax bill at the end of the year if you pay quarterly. Yes, you might underpay and have to make up the difference, but that’s nothing compared to having to deal with all of your taxes at once. Budgeting for quarterly payments also eases your cash flow more than paying a big sum at the end of the year.
Gain a better understanding of cash flow
You must keep track of your cash flow in order to make quarterly payments. If your company is still in its early stages of development and you don’t have a lot of expenses to worry about, cash flow might not be on your mind. However, as your company grows, ensuring that you have adequate cash on hand to cover expenses becomes increasingly difficult. Therefore, managing your cash flow today to plan your quarterly taxes establishes sound financial habits for the future.
Who doesn’t need to make estimated tax payments?
You don’t need to make estimated tax payments if you meet all three specific conditions:
- You didn’t owe any taxes the previous tax year
- You were a US citizen or resident the entire tax year
- Your prior tax year was 12 months long.
How much should I pay?
It’s in your best interest to try to come up with the most accurate estimate to avoid penalties and a large tax bill when you file your tax return. You must calculate your expected adjusted gross income, deductions, taxable income, taxes, and credits to figure out your estimated tax. The IRS recommends using Form 1040-ES to calculate your estimated tax payment. Corporations must use Form 1120-W to calculate their estimated tax payment.
Determine estimated tax payment based on the previous year’s return:
- If you expect your current year’s earnings to be similar to last year, then you can aim to pay at least 100 percent of your previous year’s tax liability.
- You will need your previous year’s return to calculate your estimated tax payments.
Determine estimated tax payment based on the current year’s income:
- If your income fluctuates, you should calculate your estimated payment based on the income earned and expenses made in each quarter.
- Aim to pay at least 90% of your current year’s tax liability.
- Record any estimated tax payment made to help determine how much you still owe.
- Your business needs to keep up with bookkeeping to pay the right amount of taxes.
If you receive salaries and wages, you can avoid having to pay an estimated tax by asking your employer to withhold more tax from your earnings. To do this, file a new Form W-4 with your employer. There is a line on Form W-4 for you to enter the additional amount you want your employer to withhold.
When are quarterly estimated tax payments due in 2022?
For estimated tax purposes, the year is divided into four payment periods, and each period has a specific payment due date. Below are the periods and due dates for the 2022 tax year:
Period Income Earned | Estimated Tax Due Date |
January 1 to March 31 | April 18, 2022 |
April 1 to May 31 | June 15, 2022 |
June 1 to August 31 | September 15, 2022 |
September 1 to December 31 | January 17, 2023 |
How can I pay my quarterly estimated taxes?
You can mail in your estimated tax payment with Form 1040-ES. However, the easiest way for individuals and businesses to pay their estimated federal taxes is online. Make all of your federal tax payments, including federal tax deposits (FTDs), installment agreements, and estimated tax payments using the Electronic Federal Tax Payment System (EFTPS). If it is easier to pay your estimated taxes weekly, bi-weekly, monthly, etc., you can, as long as you have paid enough in by the end of the quarter. Using EFTPS, you can access a history of your payments, so you know how much and when you made your estimated tax payments.
Do I have to make estimated tax payments to the state?
You will also have to make estimated tax payments to your state if it has a personal income tax. Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming do not have a personal income tax. New Hampshire and Tennessee also do not have a personal income tax, but they do tax interest and dividend income. Click here to locate your state tax agency information.
Trust Your Taxes to Eco-Tax
Do you need assistance with quarterly deadlines? We specialize in tax and bookkeeping for small businesses. To learn more about how we can help you with estimated tax payments, contact us today to book a free consultation with one of our trusted advisors. We look forward to partnering with you!