Marcus Explains: Estimated Tax Payments

What we’ll cover:

• Self-employed? You’re probably going to have to make estimated tax payments to the IRS
• Estimated tax payments are due quarterly – usually on April 15, June 15, September 15 and January 15 (following year)
• Consider using a savings account to set aside some money for your estimated tax payments

If you work at a traditional full-time job and get a regular paycheck, you’re probably used to seeing your employer withholding a certain amount of your pay for tax purposes. Your employer sends these tax payments to the IRS on your behalf, saving you from having to do this yourself. 

But if you don’t pay taxes through this employer withholding method – for example, if you’re self-employed – you’re probably going to have to make estimated tax payments to the IRS. 

Paying estimated taxes takes a little more work. If you’re feeling a little lost, don’t worry – we’ve unpacked some of the basics for you. Read on to learn more about how estimated tax payments work.  

Why some taxpayers make estimated tax payments

Taxes are due whenever you earn or receive income. The IRS describes it as “pay-as-you-go,” which requires you to pay your taxes on a periodic basis throughout the year. 

There are two ways to do this. We’ve already mentioned that one way is through the employer tax withholding method, where your employer sends the payments to the IRS for you. 

The second way is by making quarterly estimated tax payments, where you send in the payments to the IRS yourself. You’re likely going to have to make estimated payments if taxes are not automatically withheld (or if not enough is withheld) for you as you earn money during the year.  

It’s also possible for some taxpayers to use a combination of both methods.

Who has to pay estimated taxes?

Generally, you are required to pay estimated taxes if both of these conditions apply:

1.) You expect to owe at least $1,000 or more when you file a tax return for the current year.

2.) The total amount of your withholding is less than the smaller of

• 90% of your current year’s tax liability
• 100% of your previous year’s tax liability (substitute 110% for 100% if adjusted gross income is greater than $150,000)

Wait, what? Yes, even if your employer is withholding taxes for you, you still have to make sure you’ve asked your employer to withhold enough so that you can avoid having to pay estimated taxes. This is why it’s important to correctly fill out the W-4 withholding form from your employer and keep it updated.

The IRS has provided some examples of situations where you may have to pay estimated taxes – specifically, if you:

• Are self-employed
• Work as an independent contractor
• Receive other types of income outside of your job (e.g., interest payments, dividends, alimony, capital gains, prize money, etc.)
• Do not withhold enough taxes from your salary
• Have a job where the employer does not withhold taxes for you

That said, certain taxpayers are subject to special rules, including farmers, fishermen, household employers, higher-income taxpayers and nonresident aliens. You can find the complete rules on tax withholding and estimated taxes in IRS Publication 505. 

What are the due dates for estimated tax payments?

If you’re required to make estimated tax payments, the IRS expects them on a quarterly basis. Payments are typically due on April 15, June 15, September 15 and January 15 (of the following year).

Good to know: For the 2020 tax year, the US Treasury Department and IRS have moved the deadline for the first quarterly estimated tax payment from April 15, 2020, to July 15. For more information, see the official announcement here. 

How to make estimated tax payments

Generally, you may use the worksheet in Form 1040-ES to help you with your calculations. The IRS recommends using the figures from your prior year’s tax return as a starting point. 

The total amount of your estimated tax payments depends, in part, on your estimated adjusted gross income, taxable income, deductions and credits for the given tax year. If your taxes are usually complex, consider asking a tax professional for help. 

When you’re ready to make a payment, the IRS offers several ways to pay: online, by phone, cash, check or money order. 

What happens if you don’t pay your estimated taxes?

No one is going swimming with the fishes. But if you do not pay the correct amount of estimated taxes during the tax year, you may have to pay a penalty. The penalty applies to late payments as well. To determine whether you have to pay a penalty, complete Form 2210. 

The IRS typically waives the penalty under special circumstances, including taxpayers who have been affected by a casualty or natural disaster (see “Waiver of Penalty” for more details).  

Saving for estimated tax payments

Saving for taxes is something you rarely have to think about when an employer does it for you through withholding.

Paying estimated taxes, on the other hand, requires discipline because you have to remember to save a portion of your pay periodically so that you can make your payments to the IRS on time. 

This is especially true for those who are self-employed. You can’t get too excited every time you get a big check from a client. Remember, not all of that money is yours to keep – Uncle Sam still has to take a cut. 

Want to save yourself some heartache when estimated payments are due? Consider getting into the habit of putting a portion of your self-employed income into a savings account each month (or whenever you get paid) for tax purposes. It’s also a good idea to consult with a tax professional to determine how much you should be setting aside. 

We know saving for and paying taxes is no fun. But with a little planning and discipline, making estimated tax payments won’t always inspire dread, hopefully. You got this!