Estimated quarterly tax payments are tax payments made during the year on income that hasn't had withholdings taken by an employer. In other words, the income you generate while self-employed.
The IRS considers taxes to be pay-as-you-go. Therefore, anyone who earns income must pay the IRS most of their income tax during the year as the income is earned. For an employee earning wages, this happens through automatic withholding by the employer. However, self-employed individuals and business owners earn income that is not subject to withholding, so they need to estimate their tax liability and pay it over the year through estimated quarterly tax payments rather than paying in full at year-end.
At year-end, a tax return will show the final tax liability and any payments made against it during the year, whether through withholding or estimated quarterly payments. At that point, each filer will receive a refund or pay the remaining balance.
Do I need to pay estimated quarterly tax payments?
You need to pay estimated quarterly tax payments if you meet both of the following two requirements:
- You anticipate a tax liability of greater than $1,000 ($500 for corporations) after any withholding and refundable credits.
- Your withholding was less than the smaller of 90% of your current year's tax liability or 100% of your prior year's tax liability.
Typical examples of people subject to estimated quarterly tax payments include landlords, investors, self-employed individuals, independent contractors, and those who earn royalties. Conversely, typical income sources that are not subject to withholding are interest, dividends, business earnings, and capital gains.
If you are an employee subject to withholding, you may also have other income sources that are not subject to withholding, such as rental or dividend income. In that case, your withholding may not be sufficient to cover your tax liability. You have the option to either adjust your Employee Withholding Certificate (Form W-4) to reflect additional withholding, or you can pay estimated quarterly tax payments for the additional income source. You can always use a tax withholding estimator to make sure you deduct the correct amount of withholding from your wages.
Who does not need to pay estimated quarterly tax payments?
You do not need to pay estimated quarterly tax payments if you had zero tax liability for the previous year, you were a US citizen or resident for the full year, and your previous tax year was twelve months.
When are estimated quarterly tax payments due?
Estimated tax payments are due as follows:
January 1 to March 31
April 1 to May 31
June 1 to August 31
Sept. 1 to Dec. 31
Jan. 15 of the following year
If any of these dates fall on a weekend or legal holiday, payment is due on the next business day.
You can pay at any intervals that work for you, such as weekly or monthly, as long as the amount owed is paid in full by the due date for that period.
Late payments are subject to interest and penalty. If you made late payments during the year, you would incur interest and penalties even if you ended the year with no tax liability; timely payment for each period is important.
How do I estimate my quarterly tax payment amounts?
To calculate your estimated quarterly tax payments, you need to calculate your estimated tax liability for the year and divide it by four. This is the amount that you need to pay quarterly. This involves estimating income, expenses, deductions, credits, and withholding, often using last year's numbers as a guide.
The IRS provides detailed worksheets that you can use, such as Estimated Tax for Individuals (Form 1040-ES) and Estimated Tax for Corporations (Form 1120-W). If you don't earn your income evenly throughout the year or misestimated in either direction, simply fill out a new 1040-ES and re-work the numbers for the next quarter. Any overage paid can be applied to future payments.
Your estimated payments need to equal the lesser of 90% of your current year's tax liability or 100% of your previous year's tax liability to avoid a penalty. (If your adjusted gross income from last year was $150,000 for a married couple filing jointly, or $75,000 for a single, this threshold changes to 110%.)
Remember that although estimated quarterly tax payments sound threatening, they save you from being faced with a whopping tax bill when you file your annual return; that's one surprise that you can definitely do without.