When you work for a traditional hourly or salaried job, your employer deducts income taxes from your pay. However, there is no automatic withholding mechanism in place for millions of small business owners, freelancers, side hustlers, and other self-employed taxpayers. However, just because you don’t owe them now doesn’t mean you won’t owe them later.
Estimated taxes should be paid four times a year by anyone who earns untaxed income. Estimated tax payments help you avoid IRS penalties as well as reducing your financial burden on tax day.
Although the process of filing estimated taxes can be complex, we can make it simple for you.
What is a tax estimate? You’ll pay as you go with estimated taxes if you earn or receive income that isn’t subject to federal withholding taxes throughout the year — for example, side hustle earnings or rental property income.
Estimated tax is a payment made once a quarter based on your earnings for the previous quarter. Estimated tax, in essence, allows you to pay a portion of your income tax in advance every few months to avoid paying a lump sum on Tax Day.
Who is responsible for making estimated tax payments? You might not have to pay estimated taxes if you completed the IRS W-4 form, which tells your employer how much to withhold from each paycheck.
If you aren’t a W-4 salaried employee, however, you should be aware of the importance of estimated tax payments.
If you expect to owe $1,000 or more in taxes when your return is filed, and your employment type falls into one of the following categories, you must make estimated tax payments, according to the IRS:
A freelancer or an independent contractor
Shareholder in a sole proprietorship
Other sources of income, such as:
Interest and dividends from investment sales
Past-work royalties
Alimony from a landlord
Benefits for Unemployed
Benefits of retirement
If you have other sources of income, you may qualify for Social Security benefits.
Awards and honours
As a full-time employee, you may also be required to pay estimated tax if your employer does not deduct enough from your pay.
Use the IRS Tax Withholding Estimator tool to update your W-4 with the correct withholding amount, then fill out a new W-4, Employee’s Withholding Allowance Certificate form and return it to your employer.
Whether you’re paid by direct deposit, check, or digital payment services like PayPal, CashApp, Zelle, or Venmo, you’ll have to pay estimated taxes. While you should already be paying taxes on that income, a new rule under the American Rescue Plan requires third-party payment networks to report payments of $600 or more to the IRS.
When do you have to pay your estimated tax?
Estimated taxes are due on the 15th of April, June, September, and January each year. When the 15th falls on a legal holiday or on a weekend, there is one notable exception. You must file your return by the end of the next business day if this applies to you.
Depending on your business model and annual earnings, there are a few ways to calculate your quarterly tax payments.
If you have a consistent income, estimate your tax liability for the year and send one-fourth to the IRS every quarter. Let’s say you make $80,000 and fall into the 22% marginal tax bracket. In 2022, you’ll have a federal tax bill of $17,600, or $4,400 per quarter.
If your income fluctuates throughout the year, you can estimate your tax liability based on your previous quarter’s earnings and deductions. You can use the IRS Estimated Tax Worksheet to assist you with your calculations.
You can get a refund or apply your overpayment to future quarterly taxes if you overestimated your earnings at the end of the year. The form can help you figure out how much you still owe if you underpaid.
I’m not sure how I’ll be able to pay my estimated taxes.
If you’re a corporation, use the 1120-W form instead of the 1040-ES. You can fill out the form by hand using the worksheets provided, or you can use your favourite tax software or a tax advisor to guide you through the process.
The IRS website allows you to pay your federal taxes either by mail or online. A complete list of accepted payment methods and options, including instalment plans, can also be found.
Do I have to pay state taxes in advance?
It is contingent on the situation. If you live in one of the few states in the United States that does not levy an income tax, you are only responsible for the federal taxes we’ve discussed.
If your state does levy income taxes, however, you will make estimated tax payments using the same deadlines as you would for federal taxes. For more personalised information, go to your state’s revenue department’s website or talk to your tax adviser or a tax software service.
If I don’t pay my estimated taxes, what are the consequences?
To avoid paying a late penalty, it’s a good idea to put a reminder on your calendar as the quarterly deadline approaches. If you:
After subtracting withholdings and credits, if you owe more than $1,000 in taxes
If you paid less than 90% of your taxes through estimated payments in the previous year.
In some cases, the penalty may not be imposed. The instructions in IRS form 2210 can help you learn more about estimated tax penalties and waiver conditions.
Is it possible for me to pay estimated taxes instead of regular taxes?
Without those penalties, it’s unlikely. However, some workers are exempt from having to pay Uncle Sam quarterly payments, particularly those whose income is extremely low, inconsistent, or seasonal:
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You don’t have to pay estimated taxes if your net earnings for the quarter were $400 or less; however, you must file a tax return even if no taxes are due.
You didn’t have to file an income tax return if you were a US citizen or resident alien for the entire previous year.
If your income varies dramatically throughout the year (for example, if you run a seasonal business), an annualised income instalment method may allow you to reduce or eliminate your estimated tax payments.
