5 Things To Know About Estimated Tax Payments

What are estimated tax payments?

One of the most common questions that I get from my clients is, “What are estimated tax payments?” Estimated tax payments are periodic payments made by individuals and businesses to prepay their taxes throughout the year. They are typically used to cover federal income tax, self-employment tax, and state income tax. These payments are made to the Internal Revenue Service (IRS) and state tax authorities to ensure that taxpayers meet their tax obligations as income is earned, rather than waiting until the end of the tax year. The amount of estimated tax payments is calculated based on your projected income and deductions for the year.

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

You will most likely need to make estimated tax payments if you have a significant amount of income from sources that do not have withholding. What do I mean by this? When you earn income as a W-2 employee, each time you are paid taxes are taken out. If you have your W-4 filled out correctly, this withholding should be enough to cover your tax bill on that income. Conversely, if you earn income as an independent contractor or by running your own business, taxes are not being taken out each time you earn money. Therefore, you need to make estimated tax payments during the year to cover this amount.

What is the penalty for not making estimated tax payments?

The failure to pay penalty is 0.5 percent of the unpaid taxes for each month or part of a month the tax remains unpaid. Additionally, you will need to pay interest at the current rate of 7 percent of the amount of the underpayment. To avoid this penalty, the total of your withholdings and timely estimated tax payments needs to be at least 90 percent of the tax shown on this year’s return or 100 percent of the tax shown on your previous year’s tax return. This is known as the “safe harbor amount”.

When are estimated tax payments due?

The quarterly estimated due dates for tax year 2023 are as follows:

1st Quarter - April 18, 2023

2nd Quarter - June 15, 2023

3rd Quarter - September 15, 2023

4th Quarter - January 15, 2024

* Note that for California taxpayers, the 1st, 2nd, and 3rd quarter estimated tax payment deadlines are all extended to October 16, 2023.

What if my estimated tax payments are too high?

If you overpaid your estimated tax payments, don’t worry as you will get the amount back when you file your tax return in the form of a refund. Another option if you overpaid your estimated tax payments would be to apply your overpayment to next year’s tax return. This will decrease your estimated tax payments for next year.

This article was written and reviewed by Chad Gaines, CPA