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Making Sense of Estimated Tax Payments

Adam Brewer • October 24, 2024

Introduction

Taxpayers with income not subject to withholding are far more likely to file a tax return with a balance due to the Internal Revenue Service (IRS).  This can then lead to being charged significant penalty and interest charges, filing with uncertain tax positions in hopes of reducing their tax bill, and eventually lead to Taxpayers not filing altogether.  To avoid these serious tax consequences the IRS has established a system for Taxpayers to make voluntary tax payments throughout the year -- Estimated Tax Payments.

Who Should Be Making Estimated Tax Payments?

Estimated Tax Payments is the method used to pay tax on income that isn’t subject to withholding. Most commonly these are earnings from self-employment, but Estimated Tax Deposits may be required for Taxpayers with significant interest, dividend, rent, and alimony income.  In addition, if you do not elect voluntary withholding, you should make estimated tax payments on other taxable income, such as unemployment compensation and the taxable part of your Social Security benefits.  Individuals expecting to owe at least $1,000 when they file their income tax return and who owed tax in the prior year are required to make estimated tax payments.  

When Are Estimated Tax Payments Due?

Estimated Tax Payments are generally paid to the Internal Revenue Service quarterly.  The payment dates set by the IRS are as follows:

  • Quarterly Payment 1:  April 15
  • Quarterly Payment 2: June 15
  • Quarterly Payment 3: September 15
  • Quarterly Payment 4: January 15 of the following year.


How Are Estimated Tax Payments Calculated?

Assuming your current year taxes are similar to the prior year, then you can simply use your prior year tax bill to estimate how much money must be deposited in the current year.  That amount can then be divided by four and submitted to the IRS consistent with the above quarterly deposit schedule.

If you expect your taxes to be significantly different from the prior year, then you or your tax professional should prepare a mock tax return using your current year tax profile.  This is the best method to estimate how much taxes will be owed.  That amount can then be divided by four and submitted to the IRS consistent with the above quarterly deposit schedule. 


How Are Estimated Tax Payments Submitted?

Traditionally, Estimated Tax Payments were submitted by check along with Form 1040-ES vouchers.

Presently, Estimated Tax Payments may also be submitted electronically through IRS.gov/payments.


Conclusion

Estimated Tax Payments are far from a perfect system, but if you have income not subject to withholding then they are essential to avoiding a big year-end tax bill.

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