What Are Estimated Taxes? CJ Miller of Sensible Money explains what estimated tax payments are, why people need to make them; who typically needs to make tax payments; what happens if you don’t pay enough; and how to make payments.

Estimated taxes are periodic tax payments made by individuals, businesses, and self-employed individuals to the Internal Revenue Service (IRS) and state tax authorities throughout the year. Unlike taxes withheld from paychecks by employers, estimated taxes are typically paid quarterly and are based on expected income that is not subject to withholding, such as self-employment income, rental income, investment income, and certain other sources of income.

Here are some key points about estimated taxes:

Who Pays Estimated Taxes: Estimated taxes are generally required for individuals, including self-employed individuals, sole proprietors, partners in partnerships, and S corporation shareholders, who expect to owe $1,000 or more in tax when they file their annual tax return. Corporations are also required to pay estimated taxes if they expect to owe $500 or more in tax.

Due Dates: Estimated tax payments are typically due on a quarterly basis, with payment deadlines falling on April 15, June 15, September 15, and January 15 of the following year (or the next business day if the deadline falls on a weekend or holiday). Individuals who earn income unevenly throughout the year may opt to pay estimated taxes based on the “annualized income installment method,” which allows for more flexibility in estimating and paying taxes.

Calculation of Estimated Taxes: To calculate estimated taxes, taxpayers generally use Form 1040-ES (Estimated Tax for Individuals) provided by the IRS. The form includes instructions for estimating tax liability, calculating the amount of estimated tax due, and making payments to the IRS and state tax authorities. Estimated taxes are typically based on the taxpayer’s expected adjusted gross income, taxable income, deductions, credits, and other relevant factors for the tax year.

Underpayment Penalty: Taxpayers who fail to pay sufficient estimated taxes throughout the year may be subject to an underpayment penalty imposed by the IRS. The penalty is calculated based on the amount of underpayment and the applicable interest rate prescribed by the IRS. To avoid or minimize underpayment penalties, taxpayers should make timely and accurate estimated tax payments based on their estimated income and tax liability for the year.

State Estimated Taxes: In addition to federal estimated taxes, many states also require taxpayers to pay estimated taxes on their state income tax liability. State estimated tax requirements vary by state, so taxpayers should check with their state tax authorities for specific rules and guidelines regarding state estimated tax payments.

Overall, estimated taxes are an important aspect of tax compliance for individuals and businesses with income not subject to withholding. By accurately estimating and paying taxes throughout the year, taxpayers can avoid penalties and interest charges and ensure that they meet their tax obligations in a timely manner.

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