Estimated Tax Payments: What to Pay and When
Estimated tax payments can be confusing, but they don’t have to be. Understanding the basics of estimated taxes and what you need to pay is key to making sure you stay in compliance with the IRS. Keeping up with estimated taxes throughout the year will help you avoid paying too much (or too little) come tax day. In this article, we’ll discuss when estimated taxes are due as well as how much you’re required to pay.
What are estimated tax payments?
Estimated tax payments are periodic payments made to the government by individuals or businesses during the year, in order to pay their expected tax liability. These payments are typically made quarterly in four equal installments and are estimated based on an individual’s or business’s expected income not subject to federal tax withholding minus deductions for the current year. The purpose of estimated tax payments is to ensure that the tax owed is paid in a timely manner, rather than as a lump sum at the end of the year, avoiding underpayment penalties.
Who should make quarterly estimated tax payments?
The Internal Revenue Service requires certain taxpayers to pay estimated tax quarterly to ensure that they are paying their fair share of taxes throughout the year. The following are the different categories of taxpayers who are required to pay estimated taxes:
- Self-Employed Individuals: If you are self-employed or run a sole proprietorship, you are required to make estimated tax payments if you expect to owe $1,000 or more in taxes for the year.
- Small Business Owners: Owners of small businesses, including S corporations, partnerships, and limited liability companies (LLCs), are required to make estimated tax payments if they expect to owe $1,000 or more in taxes for the year.
- Investors: Investors who receive income from dividends, rent, capital gains, and other sources must make estimated tax payments if they expect to owe $1,000 or more in taxes for the year.
- High-Income Taxpayers: Taxpayers with high income, including those who receive salaries, bonuses, and other forms of taxable income, may be required to make estimated state and federal income tax payments if they expect to owe $1,000 or more in taxes for the year.
When are estimated tax payments not required?
Many businesses are required to make estimated quarterly tax payments throughout the year. However, there are certain scenarios when estimated tax payments do not need to be made. These include if a business:
- is expected to owe $1,000 or less for the year in taxes
- has zero income for a particular quarter
- was not operational for the full taxable year
- filed and paid their taxes on time for the previous year
How do you calculate estimated tax payments?
It’s important to calculate your estimated tax payments accurately to avoid underpayment penalties and interest charges from the IRS. There are two methods for calculating estimated tax payments: the annualized income installment method and the prior year safe harbor method.
The Safe Harbor Method
The safe harbor method is an easy way to calculate estimated taxes and can help avoid any penalties from underpayment. To use this method, simply take the lesser of 90% of that year’s total tax liability or 100% of the previous year’s total tax liability. Plus, account for any credits taken during the taxable period when calculating estimated taxes.
The Annualized Income Installment Method
The annualized income installment method is more complicated than the safe harbor option but allows taxpayers to better account for any changes in income during their taxable period. With this approach, make four separate calculations at equal intervals during your taxable period. These calculations should include all sources of taxed income, credits awarded, and deductions made during each portion of your taxable period to accurately determine what amount needs to be paid for that quarter.
What are the quarterly tax dates for 2023?
Paying taxes can be a tricky process, especially when dealing with quarterly estimated tax payments. There are four different deadlines throughout the year for estimated taxes in 2023. Knowing these dates will help ensure that you pay your taxes on time and avoid any potential penalties. Here is an overview of the quarterly estimated tax payment deadlines for 2023:
- April 18, 2023: First estimated tax payment due
- June 15, 2023: Second quarter estimated tax payment due
- September 15, 2023: Third quarter estimated tax payment due
- January 16, 2024: Fourth quarter estimated tax payment due
How do you make an estimated tax payment?
Making estimated tax payments is a crucial step in avoiding underpayment penalties and interest charges from the IRS. Here are the steps to make an estimated tax payment:
1. Determine your estimated tax liability
The first step in making an estimated tax payment is to determine your expected tax liability for the year. You can use one of the two methods for calculating estimated tax payments, the annualized income installment method or the prior year safe harbor method, to determine your estimated tax liability.
2. Choose a payment method
Once you have determined your estimated tax liability, you need to choose a payment method to make your estimated tax payment. You can make estimated tax payments online, by mail, or through a bank or financial institution.
3. Make your payment
After choosing your payment method, you can make your estimated tax payment. Be sure to include your business name, Employer Identification Number (EIN), and the tax year and quarter for which you are making the payment. If you are making a payment for a sole proprietorship, be sure to include your name and Social Security Number instead of a business name and EIN.
4. Keep a record of your payment
It’s important to keep a record of your estimated tax payment, including the date, amount, and method of payment, to ensure that you have proof of payment in case of any issues or questions from the IRS.
What happens if a business doesn’t make estimated tax payments?
If a business fails to make estimated payments, the IRS may assess underpayment penalties and interest on the owed amount. The longer the income tax remains unpaid, the higher the estimated tax penalty will be and interest will accrue. This can also result in tax liens, wage garnishments, bank levies, and the seizure of assets. To avoid these consequences, it’s important to make accurate and timely estimated tax payments with the help of a tax professional.
Do you have to pay estimated taxes quarterly?
Estimate taxes are generally due on a quarterly basis. This means that estimated taxes must be paid four times per year – April 18th (for Q1), June 15th (for Q2), September 15th (for Q3), and January 16, 2024 (for Q4). Taxpayers may also choose to make advance payments in order to reduce their tax burden at the end of the year.
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