How to Make Estimated Tax Payments
It doesn't spare you from paying taxes on the money if you earn income during the year that's not subject to withholding—your employer doesn't conveniently deduct what you're likely to owe the Internal Revenue Service and send it to the government on your behalf. You'll have to make estimated tax payments to the IRS on your own as the year goes on.
Of course, you can always wait and send payment when you file your tax return for the year, but this isn't the ideal solution because you'll likely owe interest and penalties at that point. The IRS wants you to pay as you earn.
You might also want to make estimated payments if something happens during the year that makes it unlikely that the amount being withheld from your paycheck will be sufficient to cover your eventual tax debt.
The Schedule for Estimated Payments
Your employer would submit your taxes to the IRS on your behalf after deducting them from your pay, and it would do so according to certain deadlines. The IRS wants you to follow a similar schedule if you're self-employed or if it looks like the deductions from your pay won't be enough to cover your entire tax bill come April.
The IRS has set a series of deadlines by which you should submit your estimated payments over the course of the year or risk paying interest and penalties:
- The first payment is typically due on April 15. This covers the income you earned from January 1 through March 31.
- The second payment is due two months later on June 15. It covers the period of time from April 1 through May 31.
- The third payment comes due on September 15 and covers June 1 through August 31.
- You get a little bit of a break then until January 15 of the next year. This payment is for money earned during the time period from September 1 through December 31.
The exact dates can shift slightly from year to year if they fall on a weekend or a holiday, but usually only to the next business day. And there's no rule that says you can't make your payments early.
Some tips can help you calculate how much your payments should be and to make the most of it if you must maintain this type of ongoing relationship with the IRS.
Use Last Year's Return as a Baseline
Most tax software is capable of resurrecting your data from last year if you used it to prepare your return. This will give you an idea of what you'll owe in the current year. Some software even has the ability to build in certain scenarios so your income or deductions can be adjusted upward or downward.
Using such a planning utility can help make your calculations for estimated payments more accurate.
You Can Play Catchup
You can catch up by paying a little extra with your third and fourth payments if you miss or are unable to make the first or even the second estimated payment, but the sooner you catch up the better. This can help avoid any big tax surprises and cash crunches come April when the final bill comes due.
The important thing is to catch up as much as you possibly can before you file your return to minimize any interest charges and penalties.
And if you're short on the June 15 payment, you can send payment in July and August—you don't have to wait to catch up on September 15.
You Can Make a One-Time Payment
Big financial events are a prime time to revisit your calculations with an eye to figuring out if you should pay any estimated tax on any gains from the transaction. You can do this at any time during the year.
Remember, the schedule set by the IRS is a series of deadlines. You can always make a payment before that date, and you can cover your entire liability in one payment if you want to. You don't have to divide up what you might owe into a series of four quarterly payments.
Keep an Eye on Penalty Triggers
A penalty can be avoided if you pay at least 90% of your tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is less. Exceptions to the penalty also apply if you owe less than $1,000 when you prepare your return, if nonpayment was due to a disaster, calamity, or other "unforeseen circumstance," or if you retired after age 62 or became disabled during the tax year.
Otherwise, you can calculate your late payment penalty using IRS Form 2210. Submit the form with your 1040 tax return if it turns out that you do owe a penalty.
Tips for Calculating Federal Taxes in Advance
Check out these apps for calculating your estimated federal taxes:
- Tax Calculator by TaxSlayer: This nice-looking app can calculate federal income tax on wages, business profits, unemployment benefits, and Social Security benefits. It also handles common deductions for home and property, charitable donations, education, and IRA contributions. Check it out via the Apple App Store, Google Play, or on their web app.
- TaxCaster by Intuit: This app also calculates federal tax. You can enter your income and other financial figures by sliding a button, or you can tap the little gray arrow to go to a page where you can type in actual numbers. Check it out via the Apple App Store, Google Play, or the Intuit TurboTax website.
- TaxMode by Sawhney Systems: This is the most thorough of all the available apps. It offers support for both simple and "full" data input, and you can get a free trial. Check it out via the Apple App Store, Google Play, or on the Sawhney Systems website.
- Total Tax Insights by the American Institute of CPAs: This web-only app calculates federal and state income taxes and it can even estimate property tax and other state and local taxes. You can also compare your calculations against two additional locations, which could be a handy tool if you're thinking of moving.
How to Make Payments
You can make your estimated payments at:
- IRS.gov, Direct Pay
- EFTPS.gov, the Electronic Federal Tax Payment System (registration required)
- Mail a check along with Form 1040-ES.