6 FAQs About Estimated Taxes

Taxes aren’t typically considered a “fun” topic – in fact, over half of Americans report feeling increased stress at tax time each year.

But for some individuals, taxes aren’t just an annual occurrence; they come around each quarter in the form of estimated tax payments. If you fall into that group, it’s crucial that you understand and manage your tax responsibilities to avoid potential penalties.

In today’s blog, we’ll be exploring six common questions about estimated taxes, including who needs to pay them, when they’re due, how to make payments, and more.

A Quick Introduction: What are Estimated Taxes?

Rather than paying taxes once each year, the IRS requires certain individuals to make advanced tax payments each quarter. Usually, this applies to people who receive income that isn’t taxed when it’s distributed to them.

For instance, if most or all of your income comes from your freelance photography business, you aren’t paying taxes when your clients pay for your services. If you meet a certain set of criteria, that means the IRS will want you to pay those taxes each quarter.

6 FAQs About Calculating Estimated Quarterly Taxes

1. How do I know if I need to pay estimated taxes?

Whether you need to pay estimated taxes depends on several factors. Generally, you must make estimated tax payments if you expect to owe at least $1,000 in tax after subtracting your withholding and refundable credits.

The IRS writes: “Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.”

If you work for an employer and choose not to have taxes withheld from your paycheck by opting out of voluntary withholding, you may also need to pay estimated taxes.

*Note that there are some exceptions and variations to the above, specifically for those that earn income as farmers or fishermen, among other professions.

2. When are estimated tax payments due?

Quarterly estimated tax payments are due:

Quarter 1: April 15
Quarter 2: June 15
Quarter 3: September 15
Quarter 4: January 15

It may be worth setting a reminder on your calendar for these dates at the beginning of the year to avoid missing or late payments.

3. How do I calculate my estimated taxes?

The IRS provides a worksheet, known as the Form 1040-ES, you can use to calculate your estimated taxes. To fill it out, you will need to know:

Your estimated income
Deductions and credits you qualify for

If you think you’ll have roughly the same tax liability as last year, you can take your total owed from the previous year and divide it by four. In general, you should be sending the same amount in estimated taxes each quarter.

If, however, your income varies or you realize you over- or underestimated your taxes, you can file a new Form 1040-ES and an accompanying Form 2210 to correct the amount.

4. How do I make estimated tax payments?

You can pay your estimated taxes online, by phone, or by mail. Online options include a wire transfer, credit/debit card payment, electronic funds withdrawal, or digital wallet, and can be submitted through the IRS’ Electronic Federal Tax Payment System (EFTPS).

Visit this helpful guide from the IRS to learn more about enrolling for online payments, creating a payment plan, scheduling payments in advance, and more.

5. What if I paid too much or too little in estimated taxes?

If you overpay your estimated taxes, you can choose to apply the excess to your next quarterly payment or request a refund when you file your annual tax return. Conversely, if you underpay, you might owe a penalty. In either case, you’ll need to file an additional Form 1040-ES to correct your payment amount, as well as a Form 2210 in instances of underpayment.

The IRS may waive the penalty if you had a reasonable cause for underpaying, such as a significant change in your income or deductions.

6. What if I miss an estimated tax payment?

Missing an estimated tax payment can result in a penalty, which accrue interest until paid in full. The penalty is calculated based on the amount of underpayment, the period it was underpaid, and the current interest rate set by the IRS. In 2024, the interest rate is 8%.

If you find yourself with a missed payment penalty, it may be worth consulting with a financial advisor or tax professional to create a payment plan and avoid future penalties.

Understanding and managing estimated taxes is essential for anyone receiving income not subject to withholding. By staying informed and proactive using the above FAQs on estimated taxes, you can avoid penalties and keep your finances in good shape.

Feel Confident in Your Finances – Even During Tax Season

Our team can help you navigate through estimated taxes and craft a personalized financial plan that best suits your current needs and long-term goals. Click here to schedule a complimentary consultation and get started today.