April 15 isn’t the only day the IRS expects to receive money. America runs a pay-as-you-earn tax system, which means that as soon as you get paid, the IRS wants its cut. And depending on the sort of work you do or how you’re paid, you might need to settle your tax bill every quarter via estimated tax payments.
Who needs to make quarterly tax payments?
For most people, pay-as-you-earn happens through payroll taxes — that bite Uncle Sam takes out of your regular paycheck. But if you don’t have taxes withheld from your pay, or you already know you’ll have a big bill when you file your tax return next April, you probably need to make quarterly estimated tax payments.
The IRS says you need to make quarterly estimated tax payments if you expect:
- You’ll owe at least $1,000 in federal income taxes this year, even after accounting for your withholding and refundable credits (such as the earned income tax credit), and
- Your withholding and refundable credits will cover less than 90% of your tax liability for this year or 100% of your liability last year, whichever is smaller. (The threshold is 110% if your adjusted gross income last year was more than $150,000 for married couples filing jointly or $75,000 for singles.)
Independent contractors, freelancers and people with side gigs are prime candidates for quarterly estimated tax payments, says Bess Kane, a CPA in San Mateo, California. That’s because there’s no tax automatically withheld on their income, she explains.
People with rental income and investments might need to make quarterly estimated tax payments, too — even if their employers withhold taxes from their paychecks.
“Those might not always be calculated into their withholding amount, and then they come up short and end up having to pay an estimated tax penalty and don’t even know what estimated taxes are,” says Thomas Mangold, a CPA in Austin, Texas.
You don’t have to make estimated tax payments if you’re a U.S. citizen or resident alien and you had no tax liability for the full 2016 tax year. And you don’t have to pay estimated taxes unless you have untaxed income.
When are estimated taxes due?
For the 2017 tax year, estimated quarterly tax payments are due:
- April 18, 2017
- June 15, 2017
- Sept. 15, 2017
- Jan. 16, 2018
These dates don’t coincide with regular calendar quarters, so plan ahead. And you don’t have to make the payment due in mid-January if you file your 2017 tax return and pay what you owe by the end of the month.
You can make payments more often if you like, Kane says.
“I think it’s easier to make 12 smaller payments than four larger payments,” she says. “If you owe $1,200 for the year, I would rather pay $100 a month than $300 four times a year. And if we’re talking bigger numbers, it gets pretty extreme.”
How to calculate quarterly taxes
To calculate your quarterly tax payments, you can estimate the amount you’ll owe for the year, then send one-fourth of that to the IRS. For instance, if you think you’ll owe $10,000 for 2017, you’d send $2,500 each quarter.
This works best for people whose income is pretty much the same throughout the year, or for people who have a good idea of what their income is going to be, Mangold says.
Another method is to estimate your annual tax liability based on what you’ve already earned during the year. This is often better for people whose income varies. Essentially, you annualize your tax at the end of each quarter based on a reasonable estimate of your income and deductions so far this year. The IRS has a worksheet to help you do the math.
Either way, you’ll use IRS Form 1040-ES to show your income estimate and project your tax liability. IRS Publication 505 has all the rules and details, and good tax software will help you fill out the form and do the math.
If it turns out that you overestimated or underestimated your earnings, you can complete another Form 1040-ES and refigure your estimated tax for the next quarter. When you file your annual return in April, you’ll likely need to attach an extra form — IRS Form 2210 — to explain why you didn’t send equal payments.
If you paid too much, you can get a refund or apply the overage to future payments, Mangold said.
The calculations can get complicated quickly, so it’s a good idea to consult with a qualified tax preparer if you have questions. Plus, there are special rules for farmers, fishermen and certain household employers.
How to pay estimated taxes
Form 1040-ES comes with a payment voucher you can mail with your paper check.
You can pay electronically as well. The IRS’s Direct Pay system and the U.S. Treasury’s Electronic Federal Tax Payment System, for example, let you pay directly from your bank account for free. Paying with a credit card carries of fee of around 2%.
You can even pay in cash at certain IRS retail partners.
What if I don’t pay estimated taxes and just deal with it in April instead?
The IRS will charge penalties if you didn’t pay enough tax throughout the year — currently 4% of the underpayment amount for each separate due date for the number of days it remained unpaid.
The IRS can charge you a penalty for late or inadequate payments even if you’re due a refund when you file your tax return.
The IRS might give you a break on penalties if:
- You were a victim of a casualty, disaster or other unusual circumstance, or
- You’re at least 62, retired or became disabled this year or last year, and your underpayment was due to “reasonable cause” rather than “willful neglect”
How can I make this easier?
“If you’re married and your spouse has a regular job and is having taxes withheld, he or she may have enough taxes withheld to cover the two of you,” Kane explains.
You can accomplish this by giving his or her employer a new Form W-4, instructing how much tax to withhold from each paycheck. You can change your W-4 any time. If you’re getting a pension or annuity, use Form W-4P.
Tina Orem is a staff writer at NerdWallet, a personal finance website. Email: firstname.lastname@example.org.