Estimated tax payments are made to the Internal Revenue Service on a quarterly basis when insufficient taxes are remitted to the IRS on behalf of a taxpayer through the taxpayer’s employer.
Why do we have estimated tax payments?
The US tax system is set up for taxpayers to pay-as-you-go. Basically, the IRS requires you to pay them throughout the year since there’s a government to fund, after all. Therefore, remittance of tax owed is required throughout the year. If you are an employee, your employer will have you file a form W-4 http://www.irs.gov/pub/irs-pdf/fw4.pdf which indicates to them employer how much of your gross check to withhold and remit to the IRS. If you are a business owner, you will likely have to make estimated tax payments since you don’t have an employer remitting payments on your behalf. (Oh, one of the many joys of owning a business!)
There are times when the amount withheld by an individual’s employer is not enough to cover their total tax liabilities. In this case, a taxpayer will need to make payments directly to the IRS in the form estimated tax payments.
When are estimated tax payments due?
For January 1 – March 31 April 15
For April 1 – May 31 June 15
For June 1 – August 31 September 15
For September 1 – December 31 January 15 (of following year)
How do I know if I have to make estimated tax payments?
If both of the following apply, you are likely to have to make estimated tax payments:
1. You expect to owe at least $1,000 in tax after subtracting your withholding and refundable credits.
2. You expect your withholding and refundable credits to be less than the smaller of:
- 90% of the tax to be shown on your 2011 tax return, or
- 100% of the tax shown on your 2010 tax return (your 2010 tax return must cover all 12 months)
How much do I need to pay?
This part is a bit tricky and is important for you to pay attention to since the IRS says, “If you do not pay enough during any payment period, you may be charged a penalty even if you are due a refund when you file your tax return” (IRS Publication 505, p. 22)
Did you have to pay more than $1,000 in taxes this past year? Is your income-level staying the same or increasing? If your income is increasing, has your withholding also increased? These are some considerations which may lead you to the point of needing to make some estimated tax payments. Everyone’s circumstances are different, so it’s hard to give a clear answer.
Are there special circumstances?
Of course! Farmers and fishermen have some special allowances regarding making payments since their income is more seasonal. If you have specific questions about this, please let us know.
How do I make payments?
In an effort to help you make these payments, the IRS has given you plenty of options!
1. Credit an overpayment on your 1040 from the prior year.
2. Pay by check or money order using the estimated tax payment voucher.
3. Pay electronically at www.irs.gov/e-pay with credit or debit card.
4. Set-up payment through EFTPS https://www.eftps.gov/eftps/ .
Now, I realize that this hasn’t answered all of the questions you may have about estimated tax payments, but I do hope that it will give you enough information to get you started down the right path.