The IRS deems that taxes must be paid ratably throughout the year as you earn or receive income, either through withholding or estimated tax payments. However, not many types of income earned in the US are taxed “at source” via withholdings. Given that only an annual tax return filing requirement exists, a discrepancy potentially arises between a taxpayer’s total tax liability due and the tax that has been paid in or withheld during the year.
If you are a W-2 employee, you have some of your taxes deducted at each payroll cycle. There are many factors which go into whether the employer’s payroll withholding calculation (based on IRS tables and the employee’s completed Form W-4) will be sufficient to cover a taxpayer’s full tax liability for the year. Some of these factors include whether the taxpayer is single or married, whether one or both spouses have sources of income, and the marginal tax rate which the taxpayer will be taxed at.
However, if you have other types of income, or are self-employed, you likely do not have taxes withheld at the time the income is earned. Types of income that are generally not subject to withholding may include dividend income, rental income, interest income, capital gains, unemployment compensation, retirement benefits, and any taxable portion of Social Security benefits.
If you do not pay enough tax through withholding, you should make estimated tax payments, a quarterly payment of taxes for the year based on the filer’s reported income for that period.
An integral part of the service we provide to our clients is the ability to monitor their tax liability throughout the year in order to ensure that they have paid in sufficient taxes to satisfy their liability and avoid surprise tax balances due with the filing of their tax return or unnecessary penalties and interest.
Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.
Estimated Tax Payment Due Dates
Estimated taxes are usually paid on a quarterly basis, but the IRS doesn’t exactly follow standard quarters! The first quarter is the three calendar months January 1 to March 31. The second quarter is only two months long and is April 1 to May 31. The third quarter is the next three months June 1 to August 31 and the fourth quarter covers the final four months of the year September 1 to December 31.
Estimated Tax Payment Penalties
If you have not paid enough taxes during the year via withholdings and estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.
Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers, fishermen, and certain higher income taxpayers which is beyond the scope of this guide.
How to Make an Estimate Tax Payment
We recommend paying electronically via the IRS website or the U.S. Treasury’s Electronic Federal Tax Payment System (EFTPS).
When to Get a Tax Expert?
If you consistently have a balance due with the filing of your tax return, have experienced a recent change in your taxable income, or have concerns about insufficient tax withholdings on your wages, we can assist with helping you understand and manage your annual tax liability. Please submit a prospective client inquiry form via our website and we will reach out to you shortly.