The IRS requires many taxpayers to prepay their taxes throughout the year through estimated tax payments. Unlike employees whose taxes are conveniently withheld from their paychecks, self-employed individuals are certainly familiar with this concept. But wait! It’s not just the self-employed who need to be aware of estimated taxes. This article will explain who exactly needs to make estimated tax payments, how to calculate them, and different ways to make your payments. We’ve even included a helpful video to break it down further!
Who Needs to Make Estimated Tax Payments?
While many people associate estimated taxes with self-employment, it’s actually a broader requirement. Here’s a breakdown of who typically needs to make estimated tax payments:
- Self-Employed Individuals: Freelancers, contractors, and business owners all fall under this category. Since there’s no employer withholding taxes from their income, they need to make estimated payments throughout the year.
- Individuals with Income Not Subject to Withholding: This includes income from sources like investments (dividends, capital gains), rental properties, side hustles, and certain government benefits.
- Those Whose Taxes Aren’t Withheld Enough: Even if you have a W-2 job, you might still need to make estimated tax payments if you anticipate owing a significant amount of taxes at the end of the year. This could happen if you have high deductions or take multiple jobs throughout the year.
Making Estimated Tax Payments For 2024
The good news is, you’re not alone in navigating estimated taxes! The IRS provides a clear schedule for making estimated tax payments throughout the year. For 2024, the deadlines are as follows:
- April 15, 2024 (Today!): This is the first installment for the estimated tax year.
- June 17, 2024
- September 16, 2024
- January 21, 2025 (This falls in the next calendar year)
How to Calculate Your Estimated Tax Payments
While the concept of estimated taxes might seem complex, calculating them can be simplified with a little preparation. Here are two common approaches:
- Use Your Previous Year’s Tax Return: This is a good starting point, especially for individuals with consistent income. You can base your estimated payments on 100% of your prior year’s tax liability. However, this might not be ideal if your income is expected to fluctuate significantly in the current year.
- Estimate Your Current Year’s Income: This method involves projecting your income and expenses for the entire year. Once you have this estimate, you can use the IRS tax tables or tax software to calculate your estimated tax liability and then divide it by four to determine your quarterly payments.
Safe Harbor Payments: A Simpler Option
If the idea of estimating your income feels daunting, the IRS offers a “safe harbor” provision. This allows you to make estimated tax payments equal to:
- 90% of your current year’s tax liability (ideal if you expect your income to be higher than the previous year)
- 100% of your prior year’s tax liability (a good option if your income remains consistent)
However, there’s a slight twist for those with an Adjusted Gross Income (AGI) exceeding $150,000 in the prior year. In that case, the safe harbor percentages change to:
- 90% of your current year’s tax liability
- 110% of your prior year’s tax liability
Avoiding Underpayment Penalties
The IRS discourages underpaying your taxes throughout the year. There are penalties associated with underpayment, so it’s important to make estimated tax payments that are as close to your actual tax liability as possible.
Making Your Estimated Tax Payments
Thankfully, the IRS offers several convenient ways to make your estimated tax payments:
- Electronically: The IRS Electronic Federal Tax Payment System (EFTPS) allows you to schedule and make payments directly from your bank account.
- Online: You can make payments through the IRS website using your debit or credit card (a convenience fee may apply).
- By Mail: Send a check or money order payable to the “United States Treasury” along with a completed Form 1040-ES voucher.
- Phone: Call the IRS Automated Phone System at 1-800-555-4477 to make a payment using your debit or credit card (a convenience fee may apply).
**Remember, estimated taxes help ensure you’re on track with your tax obligations throughout the year. By understanding who needs to make them, how to calculate them, and different ways to make your payments, you can avoid penalties and stay compliant with the IRS. This not only saves you money in potential fines, but also avoids the stress of a large tax bill at the end of the year.
Seeking Professional Help
While this article provides a general overview of estimated taxes, it’s important to remember that everyone’s tax situation is unique. Navigating the world of estimated tax payments can be daunting, but it’s a vital aspect of financial responsibility for self-employed individuals and those with non-withheld income. By understanding the requirements, adhering to payment schedules, and leveraging safe-harbor provisions, taxpayers can avoid penalties and ensure compliance with IRS regulations.
For personalized assistance or further inquiries, don’t hesitate to reach out to our office. Our tax professionals can help you determine if you need to make estimated tax payments, calculate your estimated tax liability, and ensure you’re filing correctly to avoid any surprises come tax season. Mastering estimated tax payments is key to maintaining financial health and peace of mind in the ever-evolving landscape of taxation. Let our team guide you through the process and ensure a smooth tax season.
