What exactly are estimated tax payments and why are you reminding me to make them?!?!
Great question – if you know that you will owe more than $1,000 to the Internal Revenue Service, you will want to make quarterly tax payments. States have their own estimated tax payment threshold, so if you have out-of-WA-State income, there may be a state estimated tax payment requirement in addition to the Federal estimates.
Estimated tax payments are due on the following schedule:
Q1 4/15
Q2 6/15
Q3 9/15
Q4 1/16
And now the why: If a taxpayer is required to make estimated tax payments and does not, the Internal Revenue Service will assess an underpayment penalty based on the amount owed.
There are two ways to calculate estimated tax payments:
- Safe Harbor Method – This requires taxpayers to pay 110% of the prior year’s tax adjusted for withholding from wages (or retirement distributions). As this is a static number, taxpayers can end up overpaying if income decreases in the current year compared to the prior year or owing additional funds in April when the tax return is filed. While additional funds might be necessary, the Internal Revenue Service will not access the underpayment if the 110% has been paid in.
- Actual Method – This requires the taxpayer (or their tax preparer) to calculate the estimated tax based on year-to-date income and expenses.
Depending on your tax situation, either of the above methods can be used.
Payments can be made online at Internal Revenue Service DirectPay.
Reason for Payment: Estimated Tax Payment
Apply Payment To: 1040ES (for 1040, 1040A, 1040EZ)
Tax Period: 2023 (current tax year)
If you file jointly, please be sure to use the name and SSN of the person listed first on your tax return when logging in to Direct Pay. Payments credited to the person listed second will not be applied correctly, and it can be a time-consuming headache to get it fixed. This is a known issue at the IRS, but they haven’t been able to get it corrected yet.
Alternatively, a check can be mailed with a quarterly Form 1040-ES to Internal Revenue Service, P.O. Box 802502, Cincinnati, OH 45280-2502. Be sure to include the taxpayer’s SSN & 2023 Form 1040-ES on the check’s memo line to ensure the payment is applied to the correct taxpayer’s account and year.
We are here to help – if you have any questions regarding estimated tax payments or require assistance calculating your estimated tax payments please reach out to Taxman Associates.