Quarterly Estimated Payments

When to make them, why and how

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For most individuals that earn income without regular tax withholdings, submitting estimated tax payments can save money and reduce or eliminate a yearly tax burden. Whether you are a freelancer, contractor or self-employed, if you think you may be owing the IRS or state at year end, it's important to be familiar with estimated payments to make informed financial decisions. The process for submitting payment is simple, but determining how much to send may take more time. Fortunately, if you overpay on your estimated taxes you will see a tax refund come April.

Estimated Tax Deadlines

Quarterly estimated payments have four deadlines during the year, beginning April 15th until January 15th (see IRS website for dates). Although theses dates provide taxpayers with helpful deadlines, it's also important to note that an individual can submit payment at any time. The calculation for an underpayment penalty is determined based on how much of a persons tax liability is received by January 15th, not by meeting each quarterly payment date.

Estimated Tax Penalty

Beginning for tax year 2018, the IRS has now lowered the threshold for payments received to 80% of the total tax liability. In other words, if you are owing $1,000 to the IRS for the year, and have paid $800 by January 15th either through estimated payments or withholdings, there is no penalty added on the $200 due at tax time. In the same situation, without submitting any payment, there would be a 6% interest penalty on the $1,000 tax bill. So an additional $60 would be due at the time the returns are submitted. As the penalty acts as interest, it increases with your overall tax bill. The more you owe, the higher underpayment penalty you pay.

Submitting Estimated Taxes

The IRS accepts payment by check (1040-ES voucher), by phone or online with Direct Pay. State guidelines vary for submitting payment, so visit your state website to determine the best method. To calculate estimated taxes, reference the previous tax year and determine which changes in income, exemptions and deductions may affect the overall tax liability.

Please contact our office if you need assistance calculating or submitting your estimated tax payments.

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-- Saone Financial