Are Quarterly Estimated Taxes Necessary for You? Find Out Now!
If you are self-employed, an independent contractor, or have income that is not subject to withholding, you may need to pay quarterly estimated taxes to the IRS. Estimated taxes are a way of paying your income tax throughout the year, instead of waiting until the end of the year to file your tax return. In this blog post, we will explain what estimated taxes are, who must pay them, how to calculate them, and when to pay them.
What Are Estimated Taxes?
Estimated taxes are payments of income tax that you make to the IRS every quarter, based on your expected income and deductions for the year. They are used to pay not only income tax, but also other taxes such as self-employment tax and alternative minimum tax. Estimated taxes are required for any type of income that is not subject to withholding, such as:
- Self-employment income
- Dividend income
- Interest income
- Capital gains
- Rental income
- Royalties
- Prizes and awards
- Alimony
- Unemployment compensation
- Retirement benefits
- Social Security benefits
Paying estimated taxes is a wise move as it helps to prevent a huge tax bill when you file your yearly tax return. In addition, it also helps to avert penalties and interest charges for underpaying taxes throughout the year.
Who Must Pay Estimated Taxes?
According to the IRS, you must pay estimated taxes for the current year if you expect to owe at least $1,000 in tax after subtracting your withholding and refundable credits, and your withholding and refundable credits are less than the sm
- 90% of the tax shown on your current year’s tax return, or
- 100% of the tax shown on your prior year’s tax return (110% if your adjusted gross income was more than $150,000 or $75,000 if married filing separately).
There are some exceptions to these rules for farmers, fishermen, and certain higher-income taxpayers. You can find more details in Publication 505, Tax Withholding, and Estimated Tax.
If you receive salaries and wages, you can avoid paying estimated taxes by asking your employer to withhold more tax from your paychecks. You can do this by filing a new Form W-4 with your employer and entering the additional amount you want withheld on line 4(c).
If you are a self-employed worker, a freelancer, or someone who has a side hustle and you think you will have to pay more than $1,000 in taxes, you should consider paying estimated quarterly taxes. This is because your income does not have any tax withheld automatically.
For Corporations, estimated income tax payments may also be required if they expect to owe at least $500 for the tax year in question.
For landlords and investors, if they have income from renting properties or investing in stocks, bonds, or other assets, they might need to pay estimated quarterly taxes as well. This applies even if they have a regular job that withholds taxes from their paycheck.
How To Calculate Estimated Taxes?
To calculate your estimated taxes, you need to estimate your adjusted gross income, taxable income, taxes, deductions, and credits for the year. You can use your prior year’s tax return as a starting point, and adjust it for any changes in your income or expenses. You can also use the worksheet in Form 1040-ES, Estimated Tax for Individuals, or an online calculator like this one.
Once you have estimated your tax liability for the year, divide it by four to get your quarterly payment amount. If your income is uneven throughout the year, you may want to use the annualized income installment method to calculate your payments. This method allows you to base your payments on your actual income for each period. You can find more information on how to use this method in Publication 505.
When To Pay Estimated Taxes?
Estimated taxes are due four times a year: April 15, June 15, September 15, and January 15 of the following year. If any of these dates falls on a weekend or a legal holiday, the payment is due on the next business day. You can pay online using IRS Direct Pay or another electronic payment option. You can also mail a check or money order with Form 1040-V, Payment Voucher.
Take note that for the tax year 2023, quarterly tax payments are required to be made by April 18, June 15, and September 15. The last payment for the 2023 tax year should be settled before or on January 16, 2024.
You do not have to make a payment for the first quarter if you file your tax return by March 1 and pay all the tax you owe at that time. You do not have to make a payment for the fourth quarter if you file your tax return by January 31 of the following year and pay all the tax you owe at that time.
Conclusion
Paying quarterly estimated taxes may seem complicated and burdensome, but it is a necessary part of being a responsible taxpayer. By paying your taxes as you earn or receive income during the year, you avoid surprises and penalties when you file your annual tax return. You also help fund the government services that benefit you and your community.
If you need help with calculating or paying your estimated taxes, you can consult a qualified tax professional like me. Use the contact details below to book a quick tax chat with me.
Phone: 202-618-1297
Book Online: Link Tree
Frequently Asked Questions
1. What is paying quarterly?
When you pay quarterly, you are making payments towards taxes or bills four times a year, typically every three months. If you are self-employed, it is possible that you will need to pay estimated taxes to the IRS every quarter based on your income and expenses.
2. What is a quarterly payment schedule?
A quarterly payment schedule is a plan that shows when and how much you need to pay for taxes or bills every quarter. For example, the IRS has a quarterly payment schedule for estimated taxes that specifies the due dates and the minimum amount of tax you need to pay each quarter.
3. How do I pay advance tax?
To pay advance tax as a US taxpayer, you can use the Electronic Federal Tax Payment System (EFTPS) or pay by check or money order. It is important to estimate your income for the year and make quarterly payments to avoid penalties. You can also consult a tax professional like me for guidance on how to pay advance tax accurately and on time.
4. How many months do you pay quarterly?
You pay quarterly every three months, which means you pay four times a year. For example, if you follow the calendar year, you may pay quarterly in January, April, July, and October. However, the IRS provides due dates each year, which may not be the same for successive years.
5. How many times a year is a quarterly payment?
A quarterly payment is a payment that is made four times a year, every three months. For example, if you have a quarterly subscription to a magazine, you will pay for it four times a year. The same principle applies to quarterly tax payments.
