6 Things to Know About Estimated Tax Payments by Yovanny Hernandez, CPA
U.S. taxes are based on a pay-as-you-go system, in which individuals either have taxes withheld from their paychecks or make estimated tax payments directly to the IRS four times a year. These quarterly tax payments made every three months typically apply to business owners subject to self-employment tax and to individuals who receive income in the form of investment interest, dividends, alimony, rent, royalties, or capital gains from asset sales that may expose them to the Alternative Minimum Tax (AMT).
Who Must Pay Quarterly Estimated Taxes?
Estimated quarterly tax payments are generally required for individuals, including sole proprietors, partners, S corporation shareholders, and rental property owners, who expect to owe $1,000 or more in federal income taxes when filing their tax returns. Corporations also have an estimated quarterly payment responsibility when their expected annual tax liabilities are $500 or greater.
Who is Excluded from Quarterly Estimated Tax Payment Requirements?
Generally, you do not have to pay estimated tax for the current year if you meet all three of the following conditions:
- You had no tax liability for the prior year, meaning your total tax was zero
- You were a U.S. citizen or resident alien for the whole year
- Your prior tax year covered 12 months
If you receive W-2 wages, you also may avoid estimated tax payments by completing a new IRS Form W-4 with your employer and asking for more taxes to be withheld from your earnings.
How Do I Calculate My Quarterly Estimated Tax Liabilities?
You may use IRS Forms 1040-ES, Estimated Tax for Individuals, or 1040-ES NR, Estimated Tax for Nonresident Alien Individuals, to help determine your estimated tax liabilities in the current year based on your prior year income, less deductions and credits you are eligible to claim. The amount of the payments you owe is also affected by changes to the tax laws as well as changes to your unique personal circumstances, such as a marriage, divorce or birth of a child. It is helpful to begin the process of estimating your current-year income by looking at your prior-year tax returns.
If your income varies throughout the year, you may instead estimate your annual tax liability at the end of each quarter based on a reasonable expectation of your income and deductions for the year so far. This is often more beneficial for individuals with fluctuating income.
When are Quarterly Estimated Tax Payments Due?
Generally, you have until the 15th day of April, June, September and January following the tax year to pay your first, second, third and fourth quarter estimated taxes, respectively. When those dates fall on a weekend, the deadline is typically extended to Monday.
How to Pay Quarterly Estimated Taxes?
The IRS accepts payments by check, money order, credit or debit card via U.S. postal mail, by telephone or through taxpayers’ online accounts. For businesses, estimated tax payments are required to be paid via the Electronic Federal Tax Payment System (EFTPS).
What Happens If I Do Not Pay Quarterly Estimated Taxes or Underpay the Amount Due?
The IRS may assess an underpayment penalty on taxpayers who fail to pay enough taxes throughout the year, either through withholding or quarterly estimated tax payments. You may avoid this penalty if you owe less than $1,000 in taxes after subtracting your withholdings and credits or if you paid at least 90 percent of the tax for the current year or 100 percent of the tax shown on the return for the prior year, whichever is smaller. The IRS may also waive penalties if an underpayment is the result of a casualty, disaster or similar circumstance, or if you are at least 62 years old and you retired or became disabled during the tax year.
About the Author: Yovanny Hernandez, CPA, is a senior manager of Tax Services with Berkowitz Pollack Brant Advisors and CPAs, where he provides tax, business and compliance services to high-net-worth families and businesses in the real estate and professional services industries. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or info@bpbcpa.com.
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