All business taxpayers need to make estimated tax payments quarterly and they should do so electronically. Self-employed individuals and gig workers may also need to make quarterly estimated tax payments unless they have any extra taxes withheld from other income.
Estimated tax payments. Both individuals and businesses are required to pay taxes as income is earned or received throughout the year. Taxes can be paid either through withholding or by making estimated tax payments.
Generally, for calendar year taxpayers, estimated tax payments are due April 15, June 15, September 15, and January 15 of the following year. Sometimes these dates are pushed back a day or two because they fall on a Saturday, Sunday, or holiday.
Note. The estimated tax rules are different for farmers, fishers and certain high-income taxpayers. In addition, there are special estimated tax rules for victims of casualties or disasters, individuals who recently became disabled, recent retirees and those who receive income unevenly during the year. These special rules can be found in IRS Publication 505, Tax Withholding and Estimated Tax .
Who must pay estimated tax. Individuals, including sole proprietors, partners, and S corporation shareholders, must make estimated tax payments if they expect to owe $1,000 or more in tax when their return is filed.
In addition, individuals who don’t have enough tax withheld from their wages or salaries may need to make estimated tax payments. Individuals who receive a paycheck can check the IRS’s Tax Withholding Estimator to determine if the right amount of tax is being withheld from their paycheck.
Note. Since Partnerships and S corporations are not taxable entities, they usually don’t have to make estimated payments.
Corporations generally must make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.
How to avoid paying estimated tax. Self-employed individuals (including gig workers) can avoid paying estimated tax by withholding extra tax from other income such as salaries, wages, or retirement income. To request a payor to start or increase tax withholding, an individual should submit to the payor a new Form W-4, Employee’s Withholding Certificate . Step 4 of Form W-4 allows a taxpayer to enter an additional amount of tax to be withheld.
Note. In limited circumstances an individual doesn’t have to make estimated tax payments for the current year if they didn’t owe any tax for the prior year. An individual has no tax liability for the prior year if their total tax was zero or they didn’t have to file an income tax return.
How to figure estimated tax. To figure estimated tax, individuals must figure their expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. When figuring estimated tax for the current year, taxpayers may find it helpful to use income, deductions and credits from the prior year as a starting point.
Individuals use Form 1040-ES, Estimated Tax for Individuals , to figure their estimated tax.
Corporations use Form 1120-W, Estimated Tax for Corporations , to figure their estimated tax.
Additional information on how to figure estimated tax is available in Publication 505, Tax Withholding and Estimated Tax .
When and how to pay estimated tax. Taxpayers must make estimated tax payments quarterly—i.e., four times per year. However, some taxpayers may find it easier to pay estimated taxes weekly, biweekly, or monthly. Taxpayers may use one of these alternative payment periods if enough tax is paid by the due date for that period’s estimated payment.
Using one of the electronic payment option available on IRS.gov is the easiest way for individuals, small businesses, self-employed individuals and gig workers to make federal tax payments. In addition:
- Taxpayers can use the Electronic Federal Tax Payment System (EFTPS) for all their federal tax payments, including payments of employment taxes (federal tax deposits), installment agreement payments and estimated tax payments. EFTPS allows taxpayers to access a history of their payments, so they know when and in what amounts the payments were made.
Note. Corporations must make their tax payments using EFTPS. Additional information about corporate tax payments is available in Publication 542, Corporations.
- Individuals can use their IRS Online Account to make their estimated tax payments. An IRS Online Account allows taxpayers to see their payment history, any pending payments and other useful tax information.
Note. Both EFTPS and IRS Online Account require prior registration. Taxpayers should be sure to register well before they need to make a tax payment.
- Individuals can also make tax payments using IRS Direct Pay .
Penalties for failure to pay estimated tax. If a taxpayer doesn’t pay enough tax through withholding and estimated tax payments, they may be charged a penalty. Also, taxpayers may be charged a penalty if estimated tax payments are late, even if the taxpayer is due a refund when they file their return.
Additional information about the penalty for failure to make estimated tax payments can be found on the IRS website.
Source: Checkpoint Newsstand 5/13/22