If you’re an employee of a company, your employer withholds federal, and state if applicable, income tax from each of your paychecks. So, even though you might not think about it, you’re paying income tax as you go throughout the year. For anyone who is not a standard wage earner, it’s a different story. They must pay estimated income tax at least four times a year, which covers contributions to Social Security and Medicare taxes.
Failure to pay sufficient estimated income tax by the quarterly due dates and prior to filing a 1040 form will result in a costly underpayment penalty. The exact penalty amount will depend on how much is owed and how overdue the payments are.
Who owes
Estimated taxes are paid by the self-employed and those who receive interest or dividends, rent, gains from selling stock or assets, taxable alimony—basically anyone who receives income that isn’t subject to withholding by an employer.
Being even more specific, the IRS says you owe quarterly estimated taxes if:
Fishermen, farmers, some household employers, and certain higher-income taxpayers have different estimated tax rules that are explained in the Form 1040-ES instructions.
How to estimate
If you qualify as owing quarterly estimated tax to the IRS, there are several ways to estimate what you will owe. You could use tax preparation software, like TurboTax, or use the worksheet that accompanies Form 1040-ES.
Steps that will help you more easily and accurately predict what you will owe include knowing the current federal and state income tax rates, running monthly and quarterly financial reports, and creating projections for future quarters. Performing year-round tax planning like this will help you avoid IRS penalties and give you a clear view of your overall financial health.
How to pay
The exact tax form you should use to submit your estimated tax payments will depend on the structure of your company. If you are self-employed, a sole proprietorship, a partner, or an S-corporation shareholder and will likely owe $1,000 or more, you would use Form 1040-ES (Estimated Tax for Individuals). Corporations would use Form 1120-W (Estimated Tax for Corporations) if they expect to owe $500 or more.
Estimated taxes can be paid electronically with a credit or debit card, a withdrawal from a bank account, or through the EFTPS (the Electronic Federal Tax Payment System). You can also pay by sending a check or money order to the IRS with the voucher found at the end of Form 1040-ES.
You make these payments in four installments, due April 15, June 15, September 15, and finally January 15 of the next year. If a due date falls on a weekend or holiday, it moves to the next business day. You can also make more frequent payments or file your taxes early and include the last quarterly payment in your filing, as long as it’s before January 15.
With all of this information in mind, paying quarterly estimated income tax can become second-nature and just another routine of being self-employed, running your own business, or earning other types of income!