Employers are responsible for withholding taxes from employee wages and sending them to the correct government agencies. But what about self-employed individuals or people whose income isn’t taxed? What do they do?
If you’re self-employed or receive untaxed income, you may need to pay estimated taxes each quarter to avoid any penalties or interest. Read on to learn the ins and outs of estimated taxes, including who is responsible for paying estimated taxes, when the tax is due, and how to pay it.
What is estimated tax?
Estimated tax is a method that individuals use to pay tax on income that is not subject to withholding taxes. With estimated tax, individuals typically pay their projected tax liability on a quarterly basis.
Estimated taxes cover things like self-employment and income taxes.
You might need to pay estimated taxes if you receive income that isn’t subject to withholding, such as:
- Taxable alimony
- Gains from sales of stock
- Self-employment income
- Cash prizes and awards
- Interest income
- Other income without withholding
Who pays estimated taxes?
If you’re not an employee or do not have taxes withheld from an employer, are self-employed, or have other income not subject to withholding, you may need to pay estimated taxes.
According to the IRS, you should make estimated tax payments if one of the following applies to you:
- You expect to owe at least $1,000 in taxes after subtracting withholding tax and credits
- You do not expect your withholding tax to equal 90% of the total tax you owe for the tax year
- You do not expect your income tax withholding to cover 100% of your tax liability from the previous tax year
If you intend to file as a sole proprietor, partner, S corporation owner, shareholder, or self-employed individual, you will likely need to make estimated quarterly tax payments if you expect to owe $1,000 or more in taxes.
Businesses filing as a corporation typically need to make estimated tax payments if they expect to owe $500 or more in taxes for the year.
Who does not have to pay estimated taxes? You don’t have to pay estimated tax if you meet all three of the following requirements:
- You had no tax liability for the previous tax year
- You were a U.S. citizen or resident for the entire tax year
- Your prior tax year covered a 12-month period
If you’re unsure about whether or not you must pay estimated tax, check with the IRS.
How to calculate estimated taxes
To calculate your estimated taxes, estimate your tax year’s expected:
- Adjusted gross income (AGI)
- Taxable income
You can use your income, deductions, and credits from the previous tax year as your starting point.
Once you estimate the above information, you can calculate your estimated quarterly tax payments.
You can use the steps below to calculate your estimated taxes:
- Calculate AGI
- Calculate estimated taxable income
- Find estimated income tax
- Divide estimated income tax by four
First, estimate your income for the year. After you determine your estimated income, subtract any deductions from your estimated income total to get your AGI.
To find your estimated taxable income, subtract the standard deduction from your AGI.
Calculate income tax by multiplying your AGI by your income tax rate. You will need a tax bracket for this step. Tax brackets typically change each year, so be sure to use the most recent bracket.
After you find your estimated income tax, divide it by four to get your quarterly tax payment amount.
If you need help calculating estimated taxes, you can reference the IRS’s Estimated Tax Worksheet on Form 1040-ES, Estimated Tax for Individuals.
You can also access an estimated tax worksheet in IRS Publication 505, Tax Withholding and Estimated Tax.
Paying estimated taxes
Use Form 1040-ES to calculate and pay estimated taxes. Once you fill out Form 1040-ES, mail it to the IRS with payment or e-File it online.
Like Form 1040, Form 1040-ES also has tax payment deadlines. The deadlines for filing and paying Form 1040-ES each quarter include:
- April 15 for income received January 1 to March 31
- June 15 for income received April 1 to May 31
- September 15 for income received June 1 to August 31
- January 15 for income received September 1 to December 31
If the deadline falls on a holiday or weekend, the due date is pushed back to the next business day.
Unfortunately, the IRS does not give any extensions for estimated tax payments. Payments are due by the above deadlines.
How to pay estimated taxes
If you need to pay estimated taxes, you have a few options. You can pay online, send a payment (e.g., check) along with Form 1040-ES, pay by phone, or use the Electronic Federal Tax Payment System (EFTPS).
To pay your estimated taxes online with the IRS, use IRS Direct Pay.
If you prefer to mail your payment, you can do so along with your form. Keep in mind it will take longer for the IRS to receive your payment if you mail it.
You can pay via phone by calling the IRS. Simply enter your debit or credit card information, and you’re good to go.
You can also pay online using the federal EFTPS. You must enroll in the system to make your estimated tax payments.
Refer to Form 1040-ES for additional payment methods if the above options do not work for you.
Estimated tax penalties
The IRS may impose penalties on quarterly tax payments for a few reasons. You might be penalized if you:
- Do not pay on time
- Underpay estimated tax
- Overpay estimated tax
If you underpay your estimated taxes, you will likely need to fill out Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts.
You have a few options to avoid an estimated tax penalty. To steer clear of penalties, you can do one of the following (whichever is smaller):
- Pay either at least 90% of what you owe in taxes for the year
- Pay the same amount as what you owed the previous year (100%)
Taxpayers with higher earnings might need to pay 110% of their previous year’s tax bill. If your previous year’s adjusted gross income was more than $75,000 (married filing separately) or $150,000 (single or married filing jointly), you are expected to pay 110%.
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This article has been updated from its original publication date of October 1, 2015.
This is not intended as legal advice; for more information, please click here.