Some individuals and business entities are required to make estimated tax payments to the IRS every quarter.
Taxpayers must generally pay at least 90 percent of their taxes throughout the year through withholding, estimated tax payments or a combination of the two. If they don’t, they may owe an estimated tax penalty.
If you want to avoid massive taxes due at the end of the year with penalties and interest, it is important to know 1.) if you need to make estimated tax payments and 2.) how much payments to make.
- 1 Are you required to pay estimated taxes?
- 2 How to determine estimated taxes to make?
- 3 When to pay estimated taxes?
- 4 How to pay federal estimated taxes?
Are you required to pay estimated taxes?
Wage earners have federal taxes withheld from their paychecks. Wage earners who correctly fill out their Form W-4 generally do not need to make estimated tax payments unless they have other income outside of their employment. If you’re not sure if your withholding is enough, visit the IRS’s tax withholding estimator.
This other income includes unemployment compensation and the taxable part of Social Security benefits.
Freelancers and independent contractors
If you freelance or are working as an independent contractor, then your income taxes are not withheld. You must make your estimated tax payments throughout the year so that you end up with a large balance at tax time that you cannot pay.
How to determine estimated taxes to make?
1. The easy way – divide the prior year tax by 4
This is also known as the “safe harbor rule”. If you make estimated tax payments for this year that are at least 100% of the tax owed on your prior year return, then you will not owe an estimated tax penalty.
This method is recommended only if you expect your income to be close to what it was last year.
Here’s how to calculate your estimated tax payment using the safe harbor rule.
Bob’s 2018 Form 1040 shows $100,000 on line 15 of the return (total tax). He divides $100,000 by 4, resulting in $25,000. He must make a $25,000 estimated tax payment every quarter to avoid paying an estimated tax penalty.
2. The hard (but more accurate) way – use the IRS’ estimated tax worksheet
You’ll have to download the 1040-ES worksheet from the IRS’ website: Link.
Starting on pg 6 of the PDF, you’ll see the estimated tax worksheet. You may need a CPA to assist you.
It’s recommended that you use the estimated tax worksheet if your income will be much greater or lesser than last year.
When to pay estimated taxes?
Estimated tax payments are due every quarter as follows:
- April 15
- June 15
- September 15
- January 15
If the deadline falls on a weekend, it will be extended to the next business day.
How to pay federal estimated taxes?
To pay your taxes online go to IRS.gov/Payments. You can then pay by credit card/debit card or direct pay.
2. Mobile app
Download the app ‘IRS2Go’ on your smartphone to make a payment on your phone.
3. By phone
Debit or credit card. Call one of the IRS’ service providers. Each charges a fee that varies by provider, card type, and payment amount.
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4. Through EFTPS
To use EFTPS, you must be enrolled either online or have an enrollment form mailed to you.
Cash is an in-person payment option for individuals provided through retail partners with a maximum of $1,000 per day per transaction. To make a cash payment, you must first be registered online at www.officialpayments.com/fed, the IRS’ Official Payment provider.
6. Check or money order
If you choose to mail in your payment, there is a separate estimated tax payment voucher for each due date. The due date is shown in the upper right corner. Complete and send in the voucher only if you are making a payment by check or money order. If you and your spouse plan to file separate returns, file separate vouchers instead of a joint voucher.
To complete the voucher, do the following.
- Print or type your name, address, and SSN in the space provided on the estimated tax payment voucher. If filing a joint voucher, also enter your spouse’s name and SSN.
- Enter in the box provided on the estimated tax payment voucher only the amount you are sending in by check or money order.
- Make your check or money order payable to “United States Treasury.”
- To help process your payment accurately, enter the amount on the right side of the check like this: $ XXX.XX. Don’t use dashes or lines (for example, don’t enter “$ XXX—” or “$ XXX xx/100”)
- Enter “2019 (or applicable year) Form 1040-ES” and your SSN on your check or money order.
- Enclose, but don’t staple or attach, your payment with the estimated tax payment voucher.