It doesn't get you out of paying taxes if you make money during the year that isn't subject to withholding. Your employer doesn't take out what you're likely to owe the Internal Revenue Service and send it to the government on your behalf. As the year goes on, you'll have to send estimated tax payments to the IRS on your own.
You can always wait and send payment when you file your tax return for the year, but then you'll probably have to pay interest and penalties. The IRS wants you to pay what you can afford.
Note
You might also want to make estimated payments if something happens during the year that makes it unlikely that the amount being withheld from your paycheck will be sufficient to cover your eventual tax debt.
The Schedule for Estimated Payments
Your employer would send your taxes to the IRS after taking them out of your paycheck, and it would do this by a certain date. If you're self-employed or if it looks like your paycheck deductions won't be enough to cover your entire tax bill in April, the IRS wants you to follow a similar schedule.
The IRS has set a number of deadlines by which you must send in your estimated payments throughout the year. If you miss these deadlines, you may have to pay interest and penalties:
- The first payment is typically due on April 15. This covers the income you earned from January 1 through March 31.
- The second payment is due two months later on June 15. It covers the period of time from April 1 through May 31.
- The third payment comes due on September 15 and covers June 1 through August 31.
- You get a little bit of a break then until January 15 of the next year. This payment is for money earned from September 1 through December 31.1
The exact dates can shift slightly from year to year if they fall on a weekend or a holiday, but usually only to the next business day. And there's no rule that says you can't make your payments early.
Note
For people in Texas, Louisiana, and Oklahoma, the due date for the first payment, which was April 15, has been moved to June 15, 2021. The IRS made this announcement because these areas were hit by very bad winter storms in 2021. It has also moved the federal filing deadline for 2021 from April 15 to May 17 for taxpayers in other places. However, this change does not apply to the dates when estimated taxes are due. 2
Some tips can help you figure out how much you should pay and make the best of the situation if you have to keep dealing with the IRS in this way.
Use Last Year's Return as a Baseline
Most tax software is capable of resurrecting your data from last year if you used it to prepare your return. This should give you an idea of what you'll owe in the current year. Some software even has the ability to build in certain scenarios so your income or deductions can be adjusted upward or downward.
Note
Using such a planning utility can help make your calculations for estimated payments more accurate.
You Can Play Catch-up
You can catch up by paying a little extra with your third and fourth payments if you miss or are unable to make the first or even the second estimated payment, but the sooner you catch up, the better. This can help you avoid any big tax surprises and cash crunches come April when the final bill is due.
Note
The important thing is to catch up as much as you possibly can before you file your return, to minimize any interest charges and penalties.3
And you can send payment in July and August if you're short on the June 15 payment—you don't have to wait until September 15 to catch up.
You Can Make a One-Time Payment
Big financial events are a prime time to revisit your calculations with an eye to figuring out whether you should pay any estimated tax on any gains from a transaction. You can do this at any time during the year.
Remember, the schedule set by the IRS is a series of deadlines. You can always make a payment before a set date, and you can cover your entire liability in one payment if you want to. You don't have to divide up what you might owe into a series of four quarterly payments.
Keep an Eye on Penalty Triggers
A penalty can be avoided if you pay at least 90% of your tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is less. Exceptions to the penalty also apply if you owe less than $1,000 when you prepare your return, if non-payment was due to a disaster, calamity, or other "unforeseen circumstance," or if you retired after age 62 or became disabled during the tax year.
Otherwise, you can calculate your late payment penalty using IRS Form 2210. Submit the form with your 1040 tax return if it turns out that you do owe a penalty.3
Tips for Calculating Federal Taxes in Advance
Check out these apps for calculating your estimated federal taxes:
- Tax Calculator by TaxSlayer: This nice-looking app can calculate federal income tax on wages, business profits, unemployment benefits, and Social Security benefits. It also handles common deductions for home and property, charitable donations, education, and IRA contributions. Check it out via the Apple App Store, Google Play, or their web app.
- TaxCaster by Intuit: This app also calculates federal tax. You can enter your income and other financial figures by sliding a button, or you can tap the little gray arrow to go to a page where you can type in actual numbers. Check it out via the Apple App Store, Google Play, or the Intuit TurboTax website.
- TaxMode by Sawhney Systems: This is the most thorough of all the available apps. It offers support for both simple and "full" data input, and you can get a free trial. Check it out via the Apple App Store, Google Play, or the Sawhney Systems website.
How To Make Payments
You can mail a check to the IRS along with Form 1040-ES or make your estimated payments at:
Look at Publication 505, Tax Withholding and Estimated Tax, for the tax year 2022 to find out what's new.
As you earn or get money throughout the year, you must pay taxes. You can do this by having taxes taken out of your pay or by paying taxes ahead of time. If the amount of tax taken out of your salary or pension isn't enough, or if you get income like interest, dividends, alimony, self-employment income, capital gains, prizes, or awards, you may have to make estimated tax payments. Most of the time, if you own your own business, you need to make estimated tax payments. Taxes like self-employment tax, alternative minimum tax, and income tax are paid with estimated tax.
If you don't pay enough tax through withholding and estimated tax payments, you could be charged a penalty. If your estimated tax payments are late, you may also have to pay a penalty, even if you are due a refund when you file your tax return.
Farmers, fishermen, and some people with higher incomes have different estimated tax needs. Publication 505, Tax Withholding and Estimated Tax, has more information about these special rules for estimated taxes.
Who Must Pay Estimated Tax
Individuals, including sole proprietors, partners, and S corporation shareholders, usually have to make estimated tax payments if they expect to owe $1,000 or more in taxes when they file their return.
Companies usually have to pay estimated taxes if they expect to owe $500 or more in taxes when they file their return.
If your tax last year was more than zero, you may have to pay estimated tax for this year. Find out who must pay estimated tax by looking at the worksheet in Form 1040-ES, Estimated Tax for Individuals, or Form 1120-W, Estimated Tax for Corporations.
Who Does Not Have To Pay Estimated Tax
If you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings. To do this, file a new Form W-4 with your employer. There is a special line on Form W-4 for you to enter the additional amount you want your employer to withhold.
If you receive a paycheck, the Tax Withholding Estimator will help you make sure you have the right amount of tax withheld from your paycheck.
You don’t have to pay estimated tax for the current year if you meet all three of the following conditions.
- You had no tax liability for the prior year
- You were a U.S. citizen or resident alien for the whole year
- Your prior tax year covered a 12-month period
You had no tax liability for the prior year if your total tax was zero or you didn’t have to file an income tax return. For additional information on how to figure your estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax.
How To Figure Estimated Tax
Individuals, such as sole proprietors, partners, and people who own shares in a S corporation, usually use Form 1040-ES to figure out their estimated tax. Form 1040-ES(NR) is used by nonresident aliens to figure out how much tax they owe.
To figure out your estimated tax, you need to know your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.
When figuring out your estimated tax for the coming year, you might find it helpful to start with your income, deductions, and credits from the year before. Use your tax return from the year before as a guide. Use the worksheet on Form 1040-ES to figure out how much tax you need to pay. You need to make a guess about how much money you'll make this year. If you thought your earnings would be higher than they were, all you have to do is fill out another Form 1040-ES worksheet to figure out your estimated tax for the next quarter. If you thought your earnings would be lower than they were, you will need to fill out another Form 1040-ES worksheet to figure out your estimated tax for the next quarter. You want to give as accurate an estimate of your income as you can to avoid fines.
You need to make changes to account for both changes in your own life and changes in the tax law.
Corporations generally use Form 1120-W, to figure estimated tax.
When To Pay Estimated Taxes
For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you don’t pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return.
If a payment is mailed, the date of the U.S. postmark is the date of payment. If the due date for an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next day that isn’t a Saturday, Sunday or holiday.
How To Pay Estimated Taxes
You may send estimated tax payments with Form 1040-ES by mail, or you can pay online, by phone or from your mobile device using the IRS2Go app. You can also make your estimated tax payments through your online account, where you can see your payment history and other tax records. Go to IRS.gov/Account. Visit IRS.gov/payments to view all the options. For additional information, refer to Publication 505, Tax Withholding and Estimated Tax.
Using the Electronic Federal Tax Payment System (EFTPS) is the easiest way for individuals as well as businesses to pay federal taxes. Make ALL of your federal tax payments including federal tax deposits (FTDs), installment agreement and estimated tax payments using EFTPS. If it’s easier to pay your estimated taxes weekly, bi-weekly, monthly, etc. you can, as long as you’ve paid enough in by the end of the quarter. Using EFTPS, you can access a history of your payments, so you know how much and when you made your estimated tax payments.
Corporations must deposit the payment using the Electronic Federal Tax Payment System. For additional information, refer to Publication 542, Corporations.
Penalty for Underpayment of Estimated Tax
If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers, fishermen, and certain higher income taxpayers. Please refer to Publication 505, Tax Withholding and Estimated Tax, for additional information.
However, if your income is received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments. Use Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts (or Form 2220, Underpayment of Estimated Tax by Corporations), to see if you owe a penalty for underpaying your estimated tax. Please refer to the Form 1040 and 1040-SR Instructions or Form 1120 Instructions (PDF)PDF, for where to report the estimated tax penalty on your return.
The penalty may also be waived if:
- The failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
- You retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.
2020 Extended Due Date of First Estimated Tax Payment
Pursuant to Notice 2020-18PDF, the due date for your first estimated tax payment was automatically postponed from April 15, 2020, to July 15, 2020. Likewise, pursuant to Notice 2020-23, the due date for your second estimated tax payment was automatically postponed from June 15, 2020, to July 15, 2020. Please refer to Publication 505, Tax Withholding and Estimated TaxPDF, for additional information.
Coronavirus Tax Relief for Self-Employed Individuals Paying Estimated Taxes
Coronavirus Aid, Relief, and Economic Security (CARES) Act permits self-employed individuals making estimated tax payments to defer the payment of 50% of the social security tax on net earnings from self-employment imposed for the period beginning on March 27, 2020 and ending December 31, 2020. This means that 50% of the social security tax imposed on net earnings from self-employment earned during the period beginning on March 27, 2020, and ending December 31, 2020, is not used to calculate the installments of estimated tax due. Please refer to Publication 505, Tax Withholding and Estimated TaxPDF, for additional information.
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Before President-elect Donald Trump proposed it at the federal level, Alabama passed a law exempting overtime wages from taxes back in November 2023. Act 2023-421 (H.B. 217) excluded any amounts received by a full-time, hourly wage employee as compensation for work performed above 40 hours a week from state income taxes, starting January 1, 2024.
