How to Make Estimated Tax Payments

Understanding the nuances of quarterly estimated tax payments is crucial for individuals and businesses alike. This guide aims to demystify the quarterly estimated payments process, ensuring you stay compliant with the IRS while maintaining your financial health.

What are Quarterly Tax Payments — and Do you Need to Pay?

Estimated tax payments are primarily for taxpayers whose income isn’t subject to withholding taxes. This includes self-employed individuals, investors, landlords, and those with significant earnings from dividends, interest, alimony, or capital gains. S corporation shareholders also owe estimated taxes. If you expect to owe income tax of $1,000 or more when your return is filed, the IRS requires you to make estimated tax payments.

Corporations generally have to make these payments if they expect to owe tax of $500 or more when their return is filed.

If you did not owe income taxes the previous year, however, you do not need to pay estimated taxes.

The IRS generally does not send out alerts or notifications to individuals to inform them that they need to start making estimated tax payments. It’s primarily the taxpayer’s responsibility to determine whether they are required to pay estimated taxes and to make those payments on time.

How to Make Federal Quarterly Estimated Tax Payments Online

Watch the video below to make your federal tax payments. Written instructions found below.

1. Go to https://www.irs.gov/payments
2. You can select:
   1. Pay Now with DirectPay: Pay without creating an account with the IRS via your bank account.
   2. Pay by Debit Card, Credit Card, or Digital Wallet: Pay without creating an account with the IRS via a card.
   3. Sign in to Pay: Create or use your ID.me account. At Evolution Tax & Legal, we recommend you create an Id.me account with the IRS to submit your payments. With an account, you can view your payment history, schedule future payments, and view the amount you owe among other benefits.  
3. Follow the steps for your previous selection. Make sure you select “Estimated Tax” for the “Payment Selection” dropdown.

When are Estimated Quarterly Taxes Due for 2024 Tax Year?

The final payment for the 2023 tax year was January 16, 2024.

2024 quarterly due dates are:

• April 15, 2024
• June 17, 2024
• September 16, 2024
• January 15, 2025

Can I Pay Estimated Taxes Annually Instead of Quarterly?

Yes, you can choose to pay your estimated taxes all at once instead of making quarterly payments.

If you would like to pay all at once, you should submit your full payment by the first quarterly deadline so you do not accrue interest for late quarterly payments (see more on this below).

What Happens if I Fail to Make My Estimated Payments?

Not making your estimated quarterly tax payments can lead to several consequences, both at the federal and state levels, though the specifics can vary depending on the jurisdiction and the rules of the tax authority. Here’s what generally happens if you don’t pay your estimated quarterly taxes due:

Federal Taxes:

1. Underpayment Penalty: The IRS can impose an underpayment penalty if you don’t pay enough tax through withholding or estimated tax payments, or if you don’t pay on time. The penalty is essentially an interest charge on the amount you underpaid, calculated for the period you underpaid.
2. Interest Charges: Beyond penalties, interest accrues on any unpaid tax from the due date of the return until the date of payment in full. The interest rate is determined quarterly and is the federal short-term rate plus 3%.

3. Large Tax Bill: If you don’t make estimated payments or withhold enough tax, you might face a surprisingly large tax bill when you file your annual return, potentially leading to financial strain.

4. Tax Liens or Levies: In severe cases, if significant taxes are owed and not paid, the IRS might enforce collection through tax liens against your property or levies on your bank accounts or wages.

State Taxes:

• Penalties and Interest: Most states also have their own estimated tax payment requirements and will impose penalties and interest for underpayment or late payment, similar to the federal rules.
• Varying Rules and Rates: Each state has its own set of rules, rates, and thresholds for estimated tax payments. Some states mirror federal requirements closely, while others have distinct guidelines.
• Different Penalties: The penalties for not paying estimated taxes can vary significantly from one state to another, both in terms of how they are calculated and how much they can cost you.
• Collection Actions: States, like the federal government, can take collection actions for unpaid taxes, including liens, levies, and garnishment of wages.

Common Factors:

• Safe Harbor Rules: Both federal and many state tax systems have “safe harbor” rules, under which you won’t face a penalty if you pay a certain percentage of the tax owed (typically 90% to 110%, depending on the circumstances), or if you pay an amount based on your tax from the previous year. Your CPA or tax attorney should provide you the. value of your estimated tax payments based on your previous year tax filings.
• Adjustments During the Year: If your income changes, you might need to adjust your estimated payments. This can help avoid surprises at tax time and can also help prevent penalties for underpayment.

How to Calculate My Quarterly Payment?

Use IRS Form 1040-ES to calculate quarterly tax payment using your estimated taxes. This form includes a worksheet that helps you estimate your income, deductions, and credits for the year. Based on this estimate, you’ll determine the amount of tax you expect to owe and then divide this amount by four to find your quarterly payment amount.

Better yet, if you worked with a CPA or tax attorney for your previous year’s tax filing, they should provide you this information. At Evolution Tax & Legal, you will find the amounts on your cover letter.

How a Tax Professional Can Help with Quarterly Payments

At Evolution Tax & Legal, we are uniquely positioned to help individuals and businesses successfully navigate tax law, ensuring you stay compliant while optimizing your financial strategy. We help by:

Accurate Calculation of Estimated Taxes

• Income Estimation: Our team accurately estimates your income for the year, which is crucial for determining your estimated tax payments.
• Tax Liability Analysis: We calculate your total tax liability, taking into account all potential deductions, credits, and exclusions you’re eligible for, ensuring that your estimated payments are as accurate as possible.

Avoiding Penalties and Interest

• Safe Harbor Guidelines: We help you apply safe harbor rules, ensuring you pay enough tax throughout the year to avoid underpayment penalties.
• Adjusting Payments: We assist in adjusting your estimated tax payments throughout the year in response to changes in income, deductions, or tax law, helping you avoid overpayment or underpayment.

Tax Planning and Strategy

• Future Tax Planning: Our tax experts provide strategies for tax efficiency, advising on ways to defer income, accelerate deductions, or take advantage of tax credits and deductions.
• Year-Round Consultation: We offer ongoing advice and update you on tax law changes that might affect your estimated tax payments or overall tax strategy.

Representation and Dispute Resolution

• IRS Representation: If there are any discrepancies or disputes with the IRS regarding your estimated payments, our tax attorneys can represent you, helping to resolve issues efficiently and effectively.
• Audit Support: In the case of an audit, having our team of tax professionals who are familiar with your financial situation and tax payments can be invaluable.

FAQs

What is the qualified business income deduction and how does it affect quarterly tax payments?

The Qualified Business Income (QBI) deduction, also known as the Section 199A deduction, can impact your estimated tax payments, but it doesn’t directly relate to the requirement to make these payments. Rather, it affects the amount of income that is subject to tax, which in turn influences how much you should pay in estimated taxes. In short, the QBI deduction may lower your tax liability.

The QBI deduction allows eligible self-employed individuals, sole proprietors, and pass-through business owners (such as partnerships, S corporations, and some trusts and estates) to deduct up to 20% of their qualified business income, plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. This deduction effectively reduces your taxable income, thereby potentially lowering your tax liability.

Given the complexities surrounding the QBI deduction and its impact on your overall tax situation, consulting with a tax professional is advisable.

What is the 110% rule for estimated tax payments?

The 110% rule for estimated tax payments is a guideline set by the IRS that applies to individuals who are calculating their estimated taxes, particularly those with higher incomes. This rule is part of the safe harbor provisions designed to help taxpayers avoid underpayment penalties. Taxpayers can pay estimated taxes equal to 100% of the tax shown on their current year’s return or 110% of the tax shown on their prior year’s return, whichever is smaller.