Josh Lance

Do You Need to Make Estimated Tax Payments?

When it comes to taxes, many people struggle with whether or not they need to make estimated tax payments.  Many people are not sure when that needs to happen or if they need to do it, how they need to calculate their estimates.  This post will discuss what estimated taxes are, if they are necessary, and how to calculate them.

First thing first, here are two things regarding estimated taxes:

  1. Everyone is required to make estimated tax payments. This includes individuals and businesses.
  1. If you receive a paycheck as an employee, you are already making estimated tax payments.

In general, you are required to make payments throughout the year if you are going to have a tax liability in excess of $1,000.  If you are working a job, you will have federal taxes withheld and assuming that tax withheld does not fall short by $1,000; you have met your estimated tax requirements.

Where estimated taxes come more into play is for people who own businesses via a sole proprietorship, partnership, and S-Corporation.  These businesses generate income, however, the taxes are paid by the owners.  Therefore, the owners need to figure out and pay estimated taxes. Now, if the business you own is going to show a net loss for the year, you do not need to make estimated tax payment since those businesses will not have any taxable income.

To figure out how to estimate your taxes, it is best to start out with your prior year tax return.  From that return, you can use that as a starting point to determine how much tax to estimate and pay.  You will then take what you paid and adjust based on how your business is doing in the current year.  If your business is doing better, you can adjust and pay more for your estimated tax payments during the year.  Also, since estimated tax payments are made quarterly, you can make adjustments throughout the year based on how your business is fairing.  The IRS does realize that making estimates are just that and therefore, if you did not make enough estimated tax payments throughout the year, you can avoid paying underpayment tax penalties if your underpayment is less than $1,000 or if the taxes you paid as estimates are at least 90% of the tax for the current year or 100% of the tax shown of the prior year, whichever is smaller.  So, if you want to avoid paying penalties, if you make estimates for exactly the amount you were taxed last year, you will avoid the penalties for underpayment.

The last tricky part about paying estimated tax payments is the timing, which happens four times a year, but does not follow a quarterly schedule. The first estimated tax payment is due on April 15 of the current year.  Therefore, while you are doing your taxes for the prior year, you also need to make an estimate for the current year.  Now it would make sense that the next payment would be July 15, but it is actually June 15.  The third is exactly three months later at September 15 and the final payment is due on January 15 to allow you to know how much income or loss you have for the year and make a final estimated payment with that knowledge.

Hopefully this information has allowed you to better understand how estimated tax payments work and how best to handle them.  Please contact me if you have any questions regarding estimated tax payments.

About Josh Lance

A licensed certified public accountant (IL) and Chartered Global Management Accountant, Josh is also a family man who calls Chicago home.  Before venturing on his own with a mission to help small businesses, Josh spent his early career at a top-10 national public accounting firm before working at an ultra high net worth family office.  Josh is also an adjunct professor at Northwestern University in Evanston, IL.  He enjoys making wine at home, cooking, traveling, and cheering on his favorite football and soccer teams. Josh was honored by being selected to the 2017 class of the AICPA Leadership Academy and was named as one of the 40 under 40 in 2017 by CPA Practice Advisor.