What to Know About Estimated Tax Payments
Published on by Kate Burkhart, Lauren Huster, in Tax Services
- Estimated tax payments help taxpayers pay federal income tax throughout the year when income isn’t subject to sufficient withholding.
- Individuals generally need to consider estimated payments if they expect to owe at least $1,000 in tax, although withholding, prior-year tax liability, and other factors can affect the requirement.
- Paying enough tax throughout the year can help taxpayers avoid underpayment penalties, with safe harbor rules generally based on 90% of current-year tax or 100% of prior-year tax liability.
- Different rules may apply to higher-income taxpayers, farmers and fishers, and individuals with uneven income, making individual circumstances an important part of determining required payments.
Federal income tax is a pay-as-you-go tax. This means taxes must be paid throughout the year as income is earned or received. If enough tax isn’t paid throughout the year, penalties may apply. Taxes can be paid by having an employer withhold taxes from a paycheck or by making estimated tax payments to the IRS.
Federal individual estimated tax payments are due quarterly on April 15, June 15, September 15, and January 15 of the following year. If a due date falls on a weekend or legal holiday, the payment is due on the following business day. Payments can be made by mail, online, or through the IRS2Go app.
Who needs to make estimated tax payments
Individuals who receive income that isn’t subject to withholding may need to make estimated tax payments. This can include sole proprietors, partners, and S corporation shareholders.
Common types of income that may not have taxes withheld include:
- Interest
- Dividends
- Taxable Alimony under pre-2019 divorce agreements
- Self-employment income
- Capital gains
- Prizes and awards
Individuals who have multiple sources of income can request additional taxes be withheld from their salaries or wages by filing a new Form W-4 with their employer. Increasing withholding may reduce or eliminate the need to make additional estimated tax payments.
Individuals may utilize the annualized income installment method to reduce required estimated payments for taxpayers with uneven income throughout the year.
Who isn’t required to make estimated tax payments
Individuals who meet all of the following criteria generally aren’t required to make estimated tax payments:
- Were a U.S. citizen or resident alien for the entire year
- Had no tax liability in the prior year
- Had a prior tax year that covered a 12-month period
Additionally, individuals generally don’t have to make estimated tax payments if they expect to owe less than $1,000 in tax after subtracting withholding and refundable credits.
Corporations generally must make estimated tax payments if they expect to owe $500 or more in tax for the year. For calendar-year corporations, the installment dates are April 15, June 15, September 15, and December 15.
How to avoid underpayment penalties
An underpayment penalty may apply if an individual doesn’t pay enough tax throughout the year or makes required payments late. A penalty may still apply even if the individual ultimately receives a refund.
Generally, individuals can avoid an underpayment penalty by paying at least the lesser of:
- 90% of their current-year tax liability
- 100% of their prior-year tax liability
For higher-income taxpayers, the prior-year threshold increases to 110%. This generally applies when prior-year adjusted gross income exceeds $150,000, or $75,000 for taxpayers who are married filing separately.
Additional rules to keep in mind
Special rules apply to farmers and fishers. Generally, these rules apply when at least two-thirds of an individual’s gross income for the current or prior year comes from farming or fishing. Qualifying taxpayers may avoid a penalty by paying the lesser of 66.67% of their current-year tax or 100% of their prior-year tax. They may also avoid making estimated tax payments by filing their return and paying the entire tax due by March 1.
Underpayment penalties may be waived in certain circumstances, including casualty, disaster, or other unusual circumstances. Relief may also be available when an individual retires after reaching age 62 or becomes disabled and the underpayment was due to reasonable cause rather than willful neglect.
Next steps
Estimated tax requirements can vary depending on income, withholding, and individual circumstances. If you have questions about your estimated tax obligations or want to make sure you’re paying enough throughout the year, we’re here to help. Contact us today for a free consultation with one of our top tax pros.
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Staying on top of tax obligations throughout the year can help avoid surprises when it’s time to file. You might also be interested in our Year-End Tax Planning Guide for additional strategies and considerations to keep in mind when planning for taxes, or our blog on the IRS’s Automatic Penalty Relief program for more on potential penalty relief options.
