Updated: Oct 23, 2021
The IRS gave individual taxpayers a little grace on March 17th when they extended the tax season from April 15th to May 17th this year. This extension includes individuals who pay self-employment tax (self-employed taxpayer's share of Social Security and Medicare).
While this does provide a little breathing room it does not apply to estimated tax payments. Quarter one estimated tax payments are yet due on April 15th.
Failure to make estimated tax payments is one of the top reasons why taxpayers owe the IRS. Over the past 10 years I've realized that not many people know what estimated tax payments are and how they work. Owing the IRS then becomes an unending cycle they can't get out of alone.
To help you avoid the unending cycle of owing the IRS I'll cover:
What are Estimated Tax Payments?
The United States has a pay as you go tax system, meaning you pay as you earn. Taxpayers that are employees do this by having taxes withheld from their paychecks but sometimes they too have to make estimated tax payments.
Estimated tax is the method used to pay tax on income that isn’t subject to withholding. This is the primary way that self-employed individuals pay their taxes, both income and self-employment tax. A few other examples of this would be dividend income, rental income, and alimony income if the divorce was finalized before the Tax Cuts and Job Act aka President Trump's tax reform.
There are also situations where withholding is voluntary and if you do not opt in you should also make estimated tax payments such as unemployment compensation and the taxable portion of social security benefits.
Note: When there is an opportunity to opt in to having taxes withheld take advantage of it! Far too often I see taxpayers opt out of having taxes withheld and then come to me with a tax bill they can't pay at the end of the year. If you have a tax bill of $20,000 or more that you truly can't pay contact my team and I by calling our office at 502-632-3171 or booking a call here with America's Favorite EA.
Who Should Make Estimated Tax Payments?
Individuals that expect to owe tax of $1,000 or more when their return is filed. This includes sole proprietors, partners, and S corporation shareholders. If one of these individuals also has a W-2 job they may adjust their W-4 to have additional withholding to cover the taxes from their other income.
Failure to pay enough through withholding or estimated tax payments may result in an underpayment penalty even if you are due a refund. You can avoid this penalty if you meet the following criteria:
Your estimated payments are 90% of the tax to be shown on your current year tax return
You pay 100% of the tax shown on your prior year tax return and your prior tax return must cover all 12 months.
The percentages are different if you are a farmer, fisherman, or higher income taxpayer.
Just in case you thought corporations don't pay taxes, they're actually required to pay estimated tax payments at an even lower threshold. They make estimated payments if they expect to owe $500 or more.
How Should You Pay Estimated Tax Payments?
Estimated tax payments are due each quarter and figured using Form 1040-ES. The due dates for them are as follows:
1st Payment - April 15th
2nd Payment - June 15th
3rd Payment - September 15th
4th Payment - January 15th
If one of these dates falls on a weekend or Holiday then the due date is the next business day. Also, you don't have to pay the 4th payment on the due date if you file your tax return by the 31st of January and pay the full amount that you owe with your return.
Pro-tip: Although estimated payments are required quarterly you can make more than 4 estimated payments. As I tell my clients, the IRS will never turn down a payment from you. If you are accustomed to getting paid every other week from a W-2 job then I suggest making a payment every other week or once a month. It makes it much easier to make the payments. Personally it hurts my little feelings to see that much money leave my bank account once a quarter and it will yours too! So do yourself a favor and break it down into smaller payments!
Estimated payments can be made in the following ways:
IRS Direct Pay - online transfers directly from your bank account at no cost
Pay by Card - debit or credit card payments with a convenience fee
Electronic Fund Withdrawal - integrated e-file option done when filing return
IRS2Go - Mobile app used to access Direct Pay or Pay by Card
Pay by Phone
Official Payments - 1-888-UPAY-Tax
Link2Gov Corporation - 1-888-Pay-1040
WorldPay US, Inc. - 1-844-729-8298
EFTPS - must be enrolled online or have form sent - 1-800-555-4477
Cash - provided through retail partners but must be registered at www.officialpayments.com/fed first
Check or Money Order using Voucher - the correct address and instructions for voucher can also be found in the instructions for Form 1040-ES
So as you can see, the IRS provides multiples way for you to pay them. There will be situations where you can't pay your bill and full and that's when you should reach out to a tax professional. Do your due diligence to find out what kind of tax professional is equipped to help you. I've already done some of the ground work for you here in this video.
Estimated tax payments are the governments way of making sure that you get your taxes paid. You can face penalties if these taxes are underpaid. Individuals with W-2 income pay their estimated tax payments by telling their employer how much to take with their W-4. If you are self-employed or have income not subject to withholding you are required to figure your own estimated payments using Form 1040-ES, and make them quarterly.
While I personally think it's better to break these quarterly payments into smaller payments that don't hurt my feelings quite as much, I'm interested in hearing your thoughts. Do you make your estimated tax payments quarterly or do you just suck it up and pay the underpayment penalty at the end of the year?
Timalyn S. Bowens EA is America's Favorite EA and Louisville's Tax Expert that will work hard to find a legal solution that is customized for you! As an Enrolled Agent licensed through the Internal Revenue Service Timalyn is able to fight the IRS for taxpayers in all 50 states.
When you are facing questions regarding your personal or business taxes, working with a professional makes all the difference. At Bowens Tax Solutions, we serve our Louisville-area neighbors by providing the tax services and knowledge needed to succeed. We are here to assist you with your tax issues and preventative care. Visit our website at www.bowenstaxsolutions.com for more information.