One question we hear often from our clients, is whether or not they are required to make estimated tax payments. In this article, we’ll talk about who has to make estimated tax payments, how to do so, and what the consequences may be if you fail to.

Who is required to make estimated quarterly tax payments?

There is a common misconception that only self-employed individuals are required to make estimated tax payments. The reality is, any individual or entity with taxable income that has not had taxes already withheld could be faced with the responsibility of sending in estimated tax payments. Income types could include alimony, interest income, self employment income, dividends, the sale of an asset, etc.

Thankfully, the IRS makes it pretty straight forward by providing a worksheet (Form 1040-ES) to figure out if and how much you might owe.

At the risk of oversimplifying it, generally speaking, if you estimate that you’ll end up owing at least $1,000 in taxes at the end of the year, you should likely be paying estimated quarterly tax payments.

If you own a business (unless you plan on losing money) there is a very high probability you are required to make estimated payments.

If your employer did not take enough out of your paycheck and you ended up owing last tax season, you may have to pay estimated taxes, or you could talk to your HR department and have them adjust your W4 form to withhold more from your paycheck.

How do I pay?

Making estimated quarterly payments is very easy to do, and there are a number of ways to do it. The IRS allows individuals to pay online, by phone or mail. Perhaps the easiest way for individuals and businesses to pay their estimated taxes is through the EFTPS, a free and secure online service provided by the US Department of Treasury.

Through the EFTPS, you can choose to pay weekly, biweekly, monthly, or quarterly. Just be sure you are keeping track so you don’t end up short at the end of the quarter, otherwise you could be penalized.

So how do you know how much to pay? This can be challenging. A good starting place is using your prior year tax return. Take note of your income, deductions, tax credits, and use this information as you work your way through the worksheet provided on Form 1040-ES.

What happens if I don’t make estimated payments?

You could be penalized if you fail to make estimated payments. Ignorance is not bliss as it relates to estimated payments. If you fail to pay, if you forget to pay, if you don’t pay enough, if you don’t pay by each of the quarterly due dates, you could be hit with a penalty. So, tread carefully!

Remember, quarterly payments are estimated. When you square up with the IRS next tax season, you may find that you were short, in which case you’d end up owing the IRS even more. If you overly estimated what you’d owe, well, congratulations, you get a refund!

If you have questions about whether or not you need to make estimated quarterly tax payments, give us a call! We’d be happy to help.