What are Estimated Taxes?

Estimated tax payments are taxes paid to the IRS throughout the year on earnings that are not subject to federal tax withholding. This can include self-employment or freelancer earnings, or income you’ve earned on the side such as dividends, realized capital gains, prizes and other non-wage earnings.  You may also be liable for making estimated taxes payments if you are an employee but the withholding on your earnings doesn’t fully cover your tax liability, meaning what you expect to owe for the tax year. Estimated tax payments should be made as your income is earned and the IRS sets deadlines for collection on a quarterly basis. How much money you send to the IRS is based on your estimated tax liability for the year, which you can figure using the Estimated Tax Worksheet included with Form 1040-ES. 

Safe Harbor as it applies to estimated taxes simply means that as long as the amount of withholding, credits and estimated tax paid in the current year is at least as much as the prior year’s tax liability (or 110% of the prior year’s tax liability if your adjusted gross income was more than $75,000 or $150,000 if married filing jointly), the taxing authority may not impose underpayment of estimated tax interest or penalties.

For 2022, here’s when estimated quarterly tax payments are due:

If you earned income during this period

Estimated tax payment deadline

Jan. 1 – Mar. 31, 2022.

April 18, 2022.

April 1 – May 31, 2022.

June 15, 2022.

June 1 – Aug. 31, 2022.

Sept. 15, 2022.

Sept. 1 – Dec. 31, 2022.

Jan. 17, 2023.

These dates don’t coincide with regular calendar quarters, so plan ahead. You can also make payments more often if you like.  In my opinion, I think it is easier to make 12 smaller payments than four larger payments or one large payment per year.

One big question we often get asked is, who should make estimated payments?   Basically it is people who aren’t having enough withheld.  According to the IRS,  you need to pay estimated quarterly taxes if you expect:

  • You’ll owe at least $1,000 in federal income taxes this year, even after accounting for your withholding and refundable credits like the earned income tax credit
  • Your withholding and refundable credits will cover less than 90% of your tax liability for this year or 100% of your liability last year, whichever is smaller. The threshold is 110% if your adjusted gross income last year was more than $150,000, or $75,000 for married filing separately.
  • The self-employed, Independent contractors, freelancers and people with side gigs who expect to owe more than $1,000 in taxes are prime candidates for estimated quarterly taxes.
  • Corporations may also need to make estimated income tax payments if they’ll owe at least $500 for the tax year.
  • People with rental income and investments might need to pay estimated quarterly taxes.

So you now know you have to pay estimated taxes, but how do you know how much you should pay?  There are a few ways to figure that out.  The first is you can estimate the amount you’ll owe for the year, then send one-fourth of that to the IRS. This may work best for people whose income is pretty much the same throughout the year or for people who have a good idea of what their income is going to be. Another way is to estimate your annual tax liability based on what you’ve already earned during the year. This is often better for people whose income varies. 

Either way, you’ll use IRS Form 1040-ES to show your income estimate and project your tax liability.  However, the calculations can get complicated quickly, so it’s a good idea to consult with your tax preparer if you have questions.  

To pay your estimated taxes, the easiest way is to go to your online IRS account and make a payment.  You can also mail your estimated tax payments with IRS Form 1040-ES using a payment voucher, but the IRS highly encourages taxpayers to consider electronic methods of payment.

Any questions or concerns about your estimated tax payments, please contact the tax team at Lance CPA Group!

 

Sources:

https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

https://your.yale.edu/work-yale/financials/tax-compliance-and-planning/graduate-professional-students-and-postdoc-fellow-6