accountants working on estimated taxes

Estimated Taxes For The Savvy Taxpayer

As a busy entrepreneur leading the company, your hard work is rewarded with a nice paycheck. Since your income is self-made it isn’t subjected to withholdings. So once you go over a certain income threshold you need to be paying estimated taxes.

In this article:

  • What are estimated taxes?
  • When are estimated tax payments required?
  • How to pay estimated tax payments
  • How to pay estimated state taxes

What Are Estimated Taxes?

Generally, earnings without withholdings are subject to prepayments known as estimated taxes. This is a non-issue for W-2 employees because employers withhold taxes from their income. So when tax season comes up, withholdings cover any taxes due. 

For self-employed individuals and business owners, that isn’t the case. When tax liability hits a particular threshold, paying estimated taxes is required or hefty fines are incurred. Self-employment income and earnings from sources like investments, rentals, estates, and alimony are especially susceptible to penalties because taxpayers are unaware they need to make estimated tax payments.

Estimated Taxes AKA

  • Quarterly Taxes
  • Estimated Income Tax
  • Estimated Business Taxes

Estimated tax payments are paid at the Federal, state, and local tax levels. Prepayments are based on an estimated income for the year. You calculate your income using the preceding year’s tax return to project for the next year. In this guide, we’ll show you how to perform wise tax planning to stay on the good side of the IRS.

What Are The Estimated Tax Thresholds?

Before going gung ho on paying taxes, take note of the estimated tax thresholds. When doing your annual tax filing, look at your total tax liability and see if you meet any of these criteria:

  • Are you self-employed and is next year’s tax liability (after credits and deductions) going to be more than $1000? 
  • Is your adjusted gross income (after expenses, credits, or deductions) for this year $150,000 or more ($75,000 or more if married and filing separately), and do you expect to make more next year?
  • Are you a C corporation and is next year’s tax liability going to be more than $500?
  • Are you an S corporation and is the total of next year’s built-in gains tax, sting tax, and investment credit recapture tax, going to be more than $500?  

By answering yes to any of these questions, you meet the estimated tax thresholds. You are required to make estimated tax payments to the IRS.

Estimated Tax Underpayment Penalty

There is a Federal tax underpayment penalty for not paying enough taxes throughout the year. The late penalty is 2-15% of the total deposit, depending on how late the payment is. To avoid it:

You must make estimated payments for at least 90% of your tax liability in the current year.

OR 

You must have paid 100% of your tax liability for the previous year.

Note: For high earners, you must pay 110% every year to avoid fines.

Do you have to pay estimated taxes? flow chart

How To Pay Estimated Taxes

Depending on your company cash flow you can choose one of these estimated tax schedule options: 

Make 1 lump estimated payment for the upcoming year, on the due date of the current year’s taxes. 

OR 

Make 4 quarterly tax payments throughout the current year.

When Do I Make Quarterly Tax Payments?

Most businesses opt for quarterly tax payments. For quarterly taxes, the IRS has the same due dates every year. The due date will only change if the day falls on a Saturday, Sunday, or legal holiday. In this case, the deadline is pushed to the following business day.

Quarterly Estimated Tax Dates:

  • April 15th
  • June 15th
  • September 15th
  • January 15th

There is an exception for the last quarterly payment on January 15th. If you file annual taxes using Form 1040 you can skip the January 15th payment and pay the remaining taxes by January 31st. This can be a difficult deadline to meet if you are waiting on a form to arrive, so be prepared. 

Some businesses don’t follow the typical calendar year. Obviously, due dates differ for those running rogue on a fiscal year. If your tax year starts on a date other than January 1st, your quarterly tax payments go by your tax calendar.

Fiscal-Year Quarterly Estimated Tax Dates:

  • 15th day of the 4th month of your fiscal year
  • 15th day of the 6th month of your fiscal year
  • 15th day of the 9th month of your fiscal year
  • 15th day of the 1st month after the end of your fiscal year

An exception applies to the last quarterly tax payment for fiscal-year taxpayers as well. You are not required to make the last payment if you pay the outstanding balance with your income tax return. This only applies when filing a return by the last day of the first month, after the end of your fiscal year.

How To Calculate Estimated Tax Payments

Calculate your estimated tax payments correctly to avoid penalties. You have to pay at least 90% of the upcoming year’s tax liability. To make sure you always hit that mark it is good practice to estimate 110%, to cover any sudden income jumps. Rememberhigh-income earners always have to pay 110%. 

To calculate estimated tax payments, use your previous year’s federal tax return as a meter. If you expect business as usual then pay the same amount, or give yourself a cushion and pay 110% of the previous year’s tax liability.

Total Estimated Tax Payment (110%) = Previous Years Tax Liability x 1.10

Expecting an extraordinary tax year? We advise using projected income statements OR the IRS Estimated Tax Worksheets to calculate your upcoming tax payments. If you are choosing to make quarterly tax payments, you divide the annual sum by 4.

Accountants working on Estimated Tax Worksheet 2-1

How To Adjust Quarterly Tax Payments For Seasonal Income?

The IRS permits annualized estimated tax payments for seasonal income. These are adjustments to your quarterly tax payments so they mirror swings in business. Companies that make seasonal income should fill out the Annualized Estimated Tax Worksheet to calculate quarterly taxes. Make sure to file Form 2210 Schedule AI to notify the IRS of your seasonal income filing, otherwise, you could be charged for underpayment. 

How Do I Pay Estimated Self Employment Taxes?

Self-employed individuals must estimate taxes to include business income and self-employment (SE) tax. SE tax includes Social Security and Medicare levies all taxpayers share. To include these taxes in your estimate, first, calculate your adjusted gross income (less credits and deductions) then calculate your SE tax liability. If you need help figuring SE tax into your estimated payments use the self-employment estimated tax worksheet on Form 1040-ES page 6.

Note: Don’t forget to take the self-employment tax deduction!

What Is My Estimated Tax Rate If I Am Married And Filing Jointly?

There are special rules for estimated tax payments if you are married and filing jointly. When you jointly file, your income is considered in its entirety. If your combined adjusted gross income (AGI) hits $150,000 or more you’ll need to prepay. Even if separately each person made less than the estimated tax threshold. In this boat, the IRS requires you to pay 110% of your tax liability, so 120% makes for a good estimated tax rate.

Amended Estimated Tax Payment

Amended tax estimates are available to those experiencing unforeseen riches. Perhaps business is booming and you went over the tax threshold, or you just sold an investment for a large capital gain and your quarterly payments need to be adjusted. Whatever the case, you can calculate this adjustment by using the Amended Estimated Tax Worksheet 2-10. There are no additional forms to file but you need to begin payments in the period when the income increase occurs, or you could get fined at the end of the year.  

Note: Filing an amendment, means you will need to make quarterly payments until the end of the year. You can choose a different estimated tax schedule, quarterly or annually, at the start of the new year. 

Corporate Estimated Taxes

Corporations have a different set of rules for estimated taxes. As stated before, the corporate estimated tax threshold is liability over $500 in a tax year, less credits and deductions. Corporations that have seasonal income, can annualize estimated tax installments using Schedule A on Form 1120-W to avoid underpayment penalties during the off-season. There are two methods: the annualized income installment method or the adjusted seasonal installment method. 

There are specific conditions for the adjusted seasonal installment method. A corporation must make 70% of its income in a 6 month period, and for the preceding 3 years, it must average 70% earnings in that same 6 month period. Otherwise, the seasonal income should be calculated using the annualized income installment method.

Note: corporations submit estimated tax payments through the free Electronic Federal Tax Payment System by 8pm EDT the day before the due date, or pay with a same-day wire transfer.

Which Estimated Tax Forms Do I Need To File?

1120-W is the estimated tax form for corporations

Form 1040-ES is the estimated self-employed tax form.

Form 2210 and Schedule AI needs to be filed in addition to 1040-ES for annualized income tax payments for seasonal income.

Estimated Tax Payment Methods

Each payment method has certain rules for making estimated taxes. Deposit payroll taxes timely or you will have to pay a late fee. Review each method to see how individuals and businesses make estimated tax payments:

Pay By Credit

You can use an overpayment from your tax return as a credit to your estimated taxes. The credit cannot be refunded or used for any other payment and will be applied when you file taxes the following year.

Note: always subtract rollover credits from your estimates for the year.  

Pay By Phone

Paying by phone is a safe and secure method of paying electronically. Keep in mind you will be paying with a debit or credit card processing agency, and your payment will be subject to fees. Here are the IRS phone pay service providers:

  1. WorldPay US, Inc. 844-PAY-TAX-8TM (844-729-8298) 
  2. ACI Payments, Inc. (formerly Official Payments) 888-UPAY-TAXTM (888-872-9829)
  3. Link2GOV Corporation 888-PAY-1040TM (888-729-1040) 
  4. EFTPS 800-555-4477 (English), 800-244-4829 (Español), 800-733-4829 (access for deaf, hard of hearing, or speech disabilities with TTY/TDD equipment)

Note: You first need to enroll to use the EFTPS phone pay provider. You can enroll online or by mail

Pay By Electronic Funds Transfer 

The Electronic Federal Tax Payment System (EFTPS) is a free electronic payment system. This payment system is specifically intended for corporate tax payments, international wires, and large payments over $10 million. Again, you need to enroll with the EFTPS before you make any estimated tax payments. 

Note: All payments made using EFTPS, need to be received by 8pm EDT the day before your due date. If the website is down, you need to pay by phone. 

An accountant running from a clock worried about a deadline

Pay By Check or Money Order

To pay-by-check, you need to include the payment voucher provided by the IRS on Form 1040-ES. There are four vouchers, one for each quarterly payment. The vouchers are numbered and have dates corresponding to each quarter. Write your EIN and/or SSN on the top of your check, and note the check as “1040-ES Quarter__.” A check over $100 million cannot be processed and should be split up into multiple checks. 

Note: Make sure to mail to the address on Form 1040-ES instructions for the place where you live. Don’t use the address shown in the instructions for Forms 1040 or 1040-SR! If you change your address in the middle of the year, you need to inform the IRS by completing Form 8822 Change of Address.

Pay Online 

Direct Pay is for the humble taxpayer, who just needs to pay estimated self-employment taxes. Link a bank account and make ACH payments with no fees. These payments cannot exceed $10 million, and there is a limit of 2 payments per 24 hours. When you can’t make the full estimated tax payment, you can opt for a monthly payment plan to take out installments from your bank account.

Note: Direct Pay is available during certain hours: Monday-Saturday Midnight to 11:45pm EDT; Sunday 7am to 11:45pm EDT. Late payments due to outages or offline times will NOT be excused. 

Pay By Mobile App

Yes, even the IRS is hip to mobile, with the IRS2GO App. It will prompt you to pay via direct ACH pay or by card. Debit or credit cards are still subject to processing fees

Note: This app currently has a 2.8-star rating on Apple.   

Pay By Card

You can pay by debit or credit card, through IRS partner processors. Fees are around 2% depending on the type of card, but these fees are tax-deductible. You do NOT need to file a voucher when paying by card.

Note: There are special phone numbers for high-balance card payments over $100,000.

Pay by Cash

A pay-in-person option is provided through IRS retail partners. Individuals can pay a maximum of $1,000 per day, per transaction. To make a cash payment, you must first be registered online with ACI Payments, Inc. 

Accountants looking at a map to figure out estimated state taxes

How Do I Pay Estimated State Taxes?

Since each state follows a different tax code, estimated tax thresholds vary. Similar to Federal rules, most states require estimated tax payments when you reach a yearly tax liability of more than $500-$1000 per year. Furthermore, many states follow the same quarterly tax dates as the IRS. That does NOT mean all states are the same, check your local tax rules for individuals and businesses. 

A few pass-through business entities and individuals don’t suffer from estimated state taxes. Some states do NOT collect individual income tax, i.e no estimated state taxes

Here are the 9 states with no income tax: 

  1. Alaska
  2. Florida
  3. Nevada
  4. New Hampshire
  5. South Dakota
  6. Tennessee
  7. Texas
  8. Washington
  9. Wyoming

Don’t jump the gun and move in simply because you see a no income tax sticker. Depending on your business entity and how you file you could be responsible for estimated tax payments. 

These are the only 5 states with no corporate income tax:

  1. Wyoming
  2. Nevada
  3. Texas
  4. South Dakota
  5. Washington

States are also tricky about working in one state and living in another. If you are a resident in one state but work in another, you may receive a credit if you pay income taxes to the non-resident state. Wait! There is a catch, if your resident state has a higher tax rate than the non-resident state, you will need to make up the difference.

Ready For A 5-Star Tax Plan?

Estimated tax payments are part of a business’s tax burden. They aren’t fun to keep track of or calculate, but paying earlier rather than later helps you track your tax spending. Following a tax plan is critical to minimizing taxes and cutting costs. If your taxes are getting out of control, reach out to one of our tax pros. We have year-round tax strategies that reduce your tax bill by 10-15%.

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