The Internal Revenue Service (IRS) requires taxpayers to make quarterly estimated tax payments on their earned income. Federal and state tax payments are withheld from the paychecks of many of us.
Taxpayers have a responsibility to the IRS to submit their required payments in a timely fashion.
Key Points
- Paying your federal tax obligation in a timely manner is a legal requirement.
- The Internal Revenue Service mandates that taxpayers make anticipated tax payments by the due date.
- Interest and penalties are applied on short payment of estimated tax.
- What are estimated tax payments?
Income that is not subject to federal tax withholding tax will require estimated tax payments to be made to the IRS throughout the year. Earnings from freelance work, self-employment, or other sources (dividends, realized capital gains, rewards, etc.) mostly fall under this category.
If you are an employee and your tax withholding doesn’t cover your tax liability (the amount you expect to owe the government for the tax year), you may be required to make estimated tax payments.
Your employer will use the information you submitted on Form W-4 to calculate the amount of withholding from each paycheck.
- When estimated quarterly taxes are due?
The Internal Revenue Service requires quarterly estimated tax payments to be made as income is earned. Keep in mind that these dates don’t fall on typical calendar quarters, and adjust accordingly.
Here are the dates each expected quarterly tax payment is due in 2023:
| If you earned income during this period | Estimated tax payment deadline |
| Jan. 1 – Mar. 31, 2023. | April 18, 2023. |
| April 1 – May 31, 2023. | June 15, 2023. |
| June 1 – Aug. 31, 2023. | Sept. 15, 2023. |
| Sept. 1 – Dec. 31, 2023. | Jan. 16, 2024. |
- Who should make estimated quarterly tax payments?
Those whose funds are being withheld. You must submit anticipated tax payments to the IRS every three months if you anticipate any of the following situations:
- You expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits, and
- You expect your withholding and refundable credits to be less than the smaller of:
- 90% of the tax to be shown on your current year’s tax return, or
- 100% of the tax shown on your prior year’s tax return. (Your prior year’s tax return must cover all 12 months.)
Joint Filer
When a married couple files their taxes jointly, the combined income can push them into the next tax bracket, triggering a short withholding taa and the associated penalties and interest for underpaying estimated taxes.
Investors and property owners
Although most employees have taxes taken out of their paychecks already, those with rental income or investments may be required to make projected quarterly tax payments.
Independent Contractors
Independent contractors or those working on 1099 or corp to corp or doing side work are the primary consideration of the estimated tax. These worker get their compensation without deduction of withholding tax and create a huge liability at the time of filing of tax.
Businesses
If a company expects to owe more than $500 in income tax for the year, it may need to make quarterly projected payments throughout the year.
- How to calculate quarterly estimated taxes?
Several alternate strategies exist.
Strategy 1
- First, you can send one-fourth of your estimated yearly tax liability to the Internal Revenue Service (IRS). If you estimate that you will owe $10,000 in 2023, you would send the equivalent of $2,500 per quarter. If your income stays fairly consistent throughout the year, or if you have a decent understanding of what your income will be, this strategy may be the most beneficial to you.
Strategy 2
- You can also calculate your expected tax bill for the year by looking at your income so far. People with inconsistent incomes benefit the most from this arrangement. Essentially, at the end of each quarter, you annualize your tax based on a projection of your income and deductions for the remainder of the year. The IRS provides a calculator to aid in the calculation process.
You can use IRS Form 1040-ES to estimate your income and determine your tax liability. All the information you need to complete Form 1040-ES can be found in IRS Publication 505.
If you discover that your anticipated earnings were too high or too low, you can file a revised Form 1040-ES to adjust your quarterly estimated tax payment. If you did not submit equally distributed payments, you must include IRS Form 2210 with your yearly return. Overpayments can be refunded or carried forward as a credit against future payments.
If you need help with the calculations, contact us.
- How to estimate taxes for an income tax extension?
If you can’t submit your return to the IRS on time, you can avoid a late-filing penalty by asking for an automatic six-month tax extension before the due date. You should still pay your anticipated tax payment by the filing deadline to avoid additional fees and interest, as an extension just provides you more time to get your paperwork together.
The use of a tax calculator or tax software is another option, but it’s important to remember that these tools are not flawless.
- How to make estimated quarterly tax payments?
There are several ways you can get your estimated tax payments to the IRS, including:
- Your online IRS account.
- The IRS2Go app.
- IRS Direct Pay.
- The U.S. Treasury’s Electronic Federal Tax Payment System.
- By debit or credit (additional fees apply).
- Pay in cash at certain IRS retail partners.
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. As on 05/22/2023 the IRS interest rate is [Quarterly Interest Rates | Internal Revenue Service (irs.gov)]
| Interest Categories | 2nd Quarter(Apr-Jun) | 1st Quarter(Jan–Mar) |
| Non-Corporate overpayment (for example, individual) | 7% | 7% |
| Corporate Overpayment | 6% | 6% |
| Underpayment (Corporate and Non-Corporate) | 7% | 7% |
| GATT (part of a corporate overpayment exceeding $10,000) | 4.5% | 4.5% |
| Large Corporate Underpayment (LCU) | 9% | 9% |
| Internal Revenue Code (IRC) 6603 Deposit (Federal Short-Term Rate) | 4% | 4% |
- What are consequences for not paying / underpaying estimated tax?
The Underpayment of Estimated Tax triggers penalty and interest. The penalty may apply even if we owe you a refund. Refer Underpayment of Estimated Tax by Individuals Penalty | Internal Revenue Service (irs.gov) for more information.
Contact Surya Padhi at Sure Financials for any questions and clarification. Surya Padhi is an expert who keeps current on tax law changes as well as a member of the National Association of Tax Professionals National Association of Tax Professionals (NATP) and New Homepage – National Association of Enrolled Agents (naea.org). Visit Welcome | Sure Financials & Tax Services, LLC (surefintaxsvs.com) for more information and contact us by calling +1908.955.0696.
