The IRS requires you to pay federal income tax as it accrues, not as a lump sum at the end of the year. If you’re an employee, your employer meets the requirement for you through withholding income tax on your check.
You might have to make estimated tax payments on your own if you aren’t an employee, however, to avoid interest and penalties. Consult the chart for important tax filing deadlines for tax year 2017 — the IRS has not officially announced the filing deadlines for the 2018 tax year. Keep reading to find out if you should be paying estimated taxes and how doing so can minimize your tax debt at the end of the year.
|Quarterly Tax Deadlines 2017|
|Tax Year||Due Date|
|First quarter 2017||April 18, 2017|
|Second quarter 2017||June 15, 2017|
|Third quarter 2017||Sept. 15, 2017|
|Fourth quarter 2017||Jan. 16, 2018|
Who Must Pay Estimated Taxes?
You must make estimated tax payments if you expect to owe more than $1,000 when you file your income tax return if you’re self-employed, an independent contractor, or those who have large investment income from selling stocks, extra income from freelance work and even lottery winners. You are exempt from paying estimated taxes, however, if you meet the following three conditions:
- You did not have any tax liability the previous year
- For the entire year, you were a U.S. citizen or resident
- Your prior tax year covered a 12-month period
How Can You Calculate Estimated Taxes?
Here are two methods to calculate estimated taxes:
1. Safe Harbor Estimated Tax
If you expect to owe estimated taxes, the easiest way to calculate the amount is to rely on the safe harbor. Under the safe harbor, you won’t owe any interest or penalties if your equal, quarterly tax payments — plus any other withholding — constitute at least the amount of your tax from your prior year’s tax return.
You might need to pay more if your gross annual income is higher, however: Your estimated tax payments must be at least 110 percent of the tax from your prior year’s return if your adjusted gross income from that year exceeds $150,000 — or $75,000 if your tax filing status is married filing separately.
For example, if your AGI from the last year is $100,000 and you owed $16,000 in taxes, you must pay at least $4,000 each quarter to avoid interest and penalties under the safe harbor method of calculating estimated taxes.
2. 90 Percent of Taxes Due Estimated Tax
You can also make sure your estimated tax payments equal 90 percent of your taxes due. You can calculate this number with your estimate of how much you’ll earn for the year plus how many deductions you’ll qualify for — including itemized deductions — and tax credits you can take. Use IRS Form 1040-ES as a tax estimator to assist with your calculations.
Especially if your work as a freelancer is unpredictable, it can be hard to know exactly how much you’ll earn. You can do your best with estimates, but if your estimate for how much you’ll owe is too low, you could find yourself on the hook for interest and penalties for underpaying your estimated taxes. For these reasons, it’s safer to use the safe harbor method.
How Does Withholding Affect Estimated Tax Payments?
If you have a job that withholds money from your paychecks for taxes, that money counts toward the amount you have to pay in estimated taxes. For example, if each quarter you need to pay $4,000 but your employer withholds only $2,500, you will need to pay $1,500 in estimated taxes each quarter.
You can request your employer withhold additional amounts on top of your normal withholding so you don’t have to make estimated tax payments. You can update your Form W-4 with your employer at any time.
How Do You Make Make Estimated Tax Payments?
You make estimated tax payments quarterly throughout the year by mail, phone or electronically. Choosing to mail in your payments means you have to submit estimated tax payment vouchers — you can find them IRS Form 1040-ES — to identify your payments and make your check payable to “United States Treasury.” Where you must mail your vouchers and checks depends on where you live — check Form 1040-ES to find your mailing address.
Pay your estimated taxes by the due date for each quarterly payment. The first quarterly payment is typically due April 18, the second on June 15, the third on Sept. 15, and the fourth by Jan. 16 of the following year. The deadline is pushed to the next business day if it falls on a weekend or holiday. You don’t have to make the fourth quarter payment, however, if you file your tax return early — by Jan. 31.
How Should You Report Payments on Your Income Taxes?
If you’ve made estimated tax payments throughout the year, you must report them on your regular income tax return to get credit. You report them on Line 65 of Form 1040 and they count as a credit against your taxes due. If you’ve overpaid, you receive an income tax refund.
What are the Penalties for Underpayment of Estimated Taxes?
If you underpay your taxes, you could owe interest and penalties. If you think you owe a penalty, ask the IRS to figure it for you because it figures penalties separately for each period.
But, you might qualify for an exception if you missed the payment, however. The IRS says you can miss a payment because of a natural disaster or other extreme circumstance, or if you retired — and you were at least 62 — or suffered a disability and you had reasonable cause for the underpayment.