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Estimated Tax Payments – What You Need To Know

By: Cassandra Bartole

What are estimated tax payments?

Estimated tax payments are those made to pay tax on income that is not subject to withholding, including earnings from interest, dividends, rents, and self-employment income, among others. Additionally, taxpayers who choose to not have taxes withheld from other taxable income (such as wages and salaries reported on a W-2, unemployment compensation, or the taxable portion of Social Security benefits) should also make estimated tax payments. Estimated tax payments are made to the Internal Revenue Service, and typically paid each quarter (April 15th, June 15th, September 15th, and January 15th of the following year), but payments can be made throughout the year at any time.

Do I have to make estimated tax payments?

Many people who receive regular salary or wage compensation and do not have other significant sources of income are not required to make estimated payments, provided their tax withholdings paid throughout the year are adequate. The exact amount of necessary tax withholding will vary with each individual’s tax situation. Your accountant may advise you to make estimated payments if your expected income increases significantly in the following year. Your accountant may also advise you to make estimated payments if you are in business with yourself because estimated tax is used to pay both income tax and other taxes like self-employment tax and alternative minimum tax. When individuals do not pay enough through withholdings and estimated tax payments, they may be subject to a penalty.

   Individuals who are sole proprietors, partners and S-Corporation shareholders must make estimated tax payments if they expect to owe tax of $1,000 or more. Corporations must make estimated tax payments if they expect to owe tax of $500 or more. 

How do I make estimated tax payments?

To make an estimated tax payment, you can use the Electronic Federal Tax Payment System or pay by phone. Your accountant may also give you vouchers with your tax return which you can use to write a check and mail to the address given to make the payment.

What happens if you don’t make a payment?

If you do not make a payment on time or you don’t pay enough a penalty may apply. Taxpayers will not be subject to a penalty if they meet any of the following requirements:

  • They owe less than $1,000 in tax on their tax return
  • Throughout the year the taxpayer paid the smaller of these two amounts:
    • At least 90% of the tax due for the current year
    • 100% of the tax shown on their tax return for the prior year, or 110% if your prior year’s adjusted gross income was more than $150,000 (or $75,000 for married filing separate)

Additionally, you do not have to pay estimated tax for the current year if you meet the following three requirements:

  • You had no tax liability for the previous year (meaning you didn’t have to file an income tax return, or your total tax was $0)
  • You were a U.S. citizen or resident for the whole year
  • Your previous tax year covered a 12-month period

The penalty can also be waived if the individual underpaid due to unforeseen circumstances such as:

  • Casualty, disaster, or another unusual situation
  • The individual retired after reaching age 62 during a tax year when estimated tax payments applied
  • The individual became disabled during a tax year when estimated payments applied

How does a W-2 and other withholding affect estimates?

For many individuals, if they earn a regular salary or wages, estimated tax payments can be avoided simply by asking their employer to withhold more tax from their earnings. To find out how much you should withhold based on your income you can use the Tax Withholding Estimator.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied upon for tax, legal, or accounting advice. If you have any questions about your tax situation or our tax services, please do not hesitate to contact us at Lear & Pannepacker.