Estimated Taxes: How to Determine What to Pay and When

(June 2024)

Estimated Taxes: How to Determine What to Pay and When

In This Article

Estimated taxes can be daunting sometimes, but understanding how to determine what to pay and when is crucial for managing your tax obligations effectively. So, dive into the world of estimated taxes and unravel the key points you need to know.

Firstly, what are the estimated taxes? Well, estimated taxes are periodic payments made throughout the year to cover your tax liability when you earn income that isn’t subject to withholding. This typically applies to self-employed individuals, freelancers, independent contractors, and those with substantial investment income.

Now, you may be wondering how to determine what amount to pay. The rule is that you must pay enough to avoid a penalty but not too much to tie up excess funds. To calculate your estimated tax payment, you need to estimate your total tax liability for the year.

To start, review your previous year’s tax return and look at the total tax amount you paid. If your income and deductions for the current year are reasonably similar, you can use the previous year’s tax liability as a starting point. However, keep in mind that if there were significant changes in your income or deductions, you may need to adjust this estimation.

Next, estimate your total income for the current year based on expected earnings and other sources, such as investments or rental properties. Consider any fluctuations or changes in your income flow and take them into account while estimating.

Once you have an estimate of your income, you can then factor in deductions and credits that you anticipate claiming for the year. These deductions can reduce your taxable income and ultimately impact your overall tax liability. Some common deductions include business expenses, self-employment tax deductions, and retirement contributions, among others.

After calculating your estimated tax liability using your estimated income and deductions, divide that amount by the number of payment periods in the year to determine your periodic estimated tax payment. Usually, estimated taxes are paid on a quarterly basis, with due dates falling on the 15th day of April, June, September, and January of the following year. Remember, these dates may vary slightly, so it’s essential to stay updated with the IRS guidelines.

Keep the following steps in mind to know the estimated taxes: How to determine what to pay and when:

  1. What is Estimated Taxes
  2. Who Needs to Pay Estimated Taxes
  3. When to Pay Estimated Taxes
  4. How is the Amount of Estimated Taxes Determined
  5. Can Estimated Taxes be Paid Online
  6. What Happens if Estimated Taxes are Not Paid
  7. Can Estimated Tax Payments be Adjusted During the Year

Recap

1.  What is Estimated Taxes

Estimated taxes are a way for individuals to pay tax on income that is not subject to withholding, such as self-employment income, rental income, or investment income. When it comes to estimated taxes, think of it as making payments to the IRS to cover your taxes on income that doesn’t have taxes taken out automatically. If you’re self-employed or have income from sources like investments or rentals, you’re in the estimated tax zone.

By paying estimated taxes throughout the year, you ensure that you don’t face a large tax bill when you file your annual tax return.

2.  Who Needs to Pay Estimated Taxes

If you expect to owe at least $1,000 in federal taxes after subtracting any withholding or refundable credits, you  need to pay estimated taxes. This applies to both individuals and businesses. However, there are some exceptions, so check the specific rules that may apply to your situation.

3.  When to Pay Estimated Taxes

Estimated taxes are typically paid on a quarterly basis. The IRS has set specific deadlines for these payments, see the deadlines:

  • April 15: This is the deadline for the first quarter.
  • June 15: The second quarter’s estimated tax payment is due by this date.
  • September 15: The third quarter’s estimated tax payment is due on or before this date.
  • January 15 of the following year: The deadline for the fourth quarter’s estimated tax payment.

Note that if the deadline falls on a weekend or holiday, the due date is usually extended to the next business day. To avoid penalties, make sure to mark these dates on your calendar and submit your estimated tax payments accordingly. If you have experienced a significant change in income or financial situation during the year, consider adjusting your estimated payments to reflect these changes. Always consult with a tax professional for personalized advice based on your specific circumstances.

4.  How is the Amount of Estimated Taxes Determined

The amount of estimated tax you need to pay is  based on your expected income for the year, deductions, credits, and any other factors that may affect your tax liability. To calculate your estimated taxes, you can use either the “annualized income installment” method or the “prior year’s tax” method, depending on what works best for your situation.

5.  Can Estimated Taxes be Paid Online

Absolutely! The IRS offers several convenient ways to make estimated tax payments, including online payment options. You can make payments electronically using the Electronic Federal Tax Payment System (EFTPS) or pay directly on the IRS website using a credit or debit card. Additionally, some states offer online payment options as well.

6.  What Happens if Estimated Taxes are Not Paid  

If you neglect to pay enough estimated taxes throughout the year, you may owe penalties and interest when you file your tax return. To avoid these additional charges, it’s important to stay on top of your estimated tax payments. By accurately estimating your tax liability and making timely payments, you can minimize the chance of facing penalties.

7.  Can Estimated Tax Payments be Adjusted During the Year

Yes, you can modify your estimated tax payments if your circumstances change during the year. For example, if you experience an increase or decrease in income, changes in deductions or credits, or significant life events, you can adjust your estimated tax payments accordingly. It’s recommended to review your estimated tax payments periodically to ensure they reflect your current situation.

Recap

In summary, estimated taxes are periodic payments made to cover your tax liability when you have income that is not subject to withholding. To determine what to pay and when, estimate your income, factor in deductions and credits, and calculate your estimated tax liability. Divide this amount by the number of payment periods to find your periodic estimated tax payment. Paying your estimated taxes correctly and on time is crucial to avoid penalties and maintain a healthy financial standing with the IRS.

Now that you know what estimated taxes are and how to determine the amount to pay, it’s crucial to understand the consequences of not paying or underpaying them. Failure to pay estimated taxes or paying less than the required amount may result in penalties and interest on the unpaid amount. These penalties can add up over time and impact your overall tax liability.

To avoid any potential issues, track your income and expenses regularly and adjust your estimated tax payments accordingly throughout the year. This can ensure that you meet your tax obligations while maintaining a steady cash flow and avoiding any surprises when tax season arrives.

Remember, every individual’s financial situation is unique, and it’s always wise to consult with a tax professional or accountant who can provide personalized guidance based on your specific circumstances and also assist you in accurately estimating your tax liability and help you navigate the complex world of tax regulations and requirements.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. . For comprehensive tax, legal or financial advice, always contact a qualified professional in your area. S’witty Kiwi assumes no liability for actions taken in reliance upon the information contained herein.

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