Who, What & When of Estimated Taxes

Find out who must pay estimated taxes, how much and how often.

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Taxpayers who are self-employed, freelancers, and those who earn income from interest, dividends, rent, and alimony are required to file estimated taxes. Those who earn wages or a salary but also receive additional income from the above mentioned sources will also need to pay estimated taxes.

When to Pay Estimated Taxes

Estimated taxes must be calculated, even if there is a drop in the income, to know whether a taxpayer will owe taxes. The self-employed, sole proprietors, partners and S-corporation shareholders need to file a tax return if they owe $1,000 or more in taxes. To do this, taxpayers will need to complete Form 1040-ES, Estimated Tax for Individuals to file their taxes.

For those filing as a corporation, any taxes owed totaling $500 or above will need to be paid immediately to avoid penalties and interest. Estimated taxes are calculated based on your expected adjusted gross income, taxable income, deductions, taxes, and credits. Those filing as a corporation can use Form 1120-W, Estimated Tax for Corporations to file their taxes.

Quarterly Estimated Taxes

Quarterly estimated taxes can be paid by freelancers, self-employed, and businessmen who are unable to pay taxes annually. Estimated taxes are paid in quarterly payments (four times) in a tax year. The deadline for individual taxpayers to pay each quarter’s tax liability are:

  • Jan 1 – Mar 31:  Due date April 15
  • Apr 1 – May 31:  Due date June 15
  • Jun 1 – Aug 31:  Due date September 15
  • Sep 1 – Dec 31:  Due date January 15 of the following year

In cases of a holiday falling on the filing deadline, the due date shifts to the next business day which is not a holiday.

Ways to Pay Estimated Taxes

Estimated taxes can be paid through the following payment methods:

  • Electronic Federal Tax Payment System (EFTPS)
  • Check or money order using an estimated tax payment voucher
  • Direct transfer from your bank account
  • Credit or debit card
  • Electronic Funds Withdrawal

Estimated Tax Penalties

A penalty is imposed by the IRS for late filing or underpayment. Taxpayers should review the calculation of their estimated taxes before filing to avoid mistakes.

The IRS accepts requests for a waiver of penalties if a delay or inaccuracies in a taxpayer's tax payment is not willful and the IRS considers their non-compliance is due to a reasonable cause. Reasonable causes can include:

  • Unavoidable situations, such as a natural calamity, personal tragedy or other circumstances that deeply affected the taxpayer
  • Retirement (after 62 years of age) or disablement

In case a taxpayer owes for prior years, they will need to file estimated taxes. Those who receive wages and get their taxes withheld by their employer do not need to file estimated taxes, even if the income was received from other sources. They may simply ask their employer to withhold the added taxes they owe using Form W-4, Employee’s Withholding Allowance Certificate. To avoid an IRS penalty for late payment, taxpayers may file for an extension of time.

From the author: Tax Resolution Legal Team
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