All you need to know about the Quarterly Estimated Tax Payments
When you have a traditional hourly or salaried job, your employer usually withholds income taxes from your paychecks. But if you’re one of the millions of small-business owners, freelancers or other self-employed taxpayers, there’s no automatic withholding.
Anyone who earns income that isn’t taxed should pay estimated tax payments four times a year. Taxpayers with other income not subject to withholding — including interest, dividends, capital gains, alimony, cryptocurrency and rental income — normally make quarterly estimated tax payments, too.
It not only minimizes your financial burden when Tax Day comes but it can help you avoid IRS penalties. The estimated-tax filing process can be a bit complicated, but we can make it simple. Here’s everything you need to know to calculate your taxes and file on time.
It is important to remind that you have to pay your taxes before April 15th, even if you have an extension for filing, no for paying.
What are estimated taxes?
If you earn or receive income that isn’t subject to federal withholding taxes throughout the year — side hustle earnings or income from a rental property, for example — you’ll pay as you go with estimated taxes. Estimated tax is a quarterly payment based on your income for the period. Essentially, estimated tax allows you to prepay a portion of your income tax every few months to avoid paying a lump sum on Tax Day.
When are estimated taxes due?
Estimated taxes are paid quarterly, usually on the 15th day of April, June, September and January of the following year. One notable exception is if the 15th falls on a legal holiday or a weekend. In those cases, you must file your return by the next workday.
The deadlines for 2022 estimated taxes are in the table below.
Estimated tax deadlines
|Earning period||Taxes due|
|Sept. 1 to Dec. 31, 2021||Jan. 18, 2022|
|Jan. 1 to March 31, 2022||April 18, 2022|
|April 1 to May 31, 2022||June 15, 2022|
|June 1 to Aug. 31, 2022||Sept. 15, 2022|
|Sept. 1 to Dec. 31, 2022||Jan. 16, 2023|
Who must pay estimated taxes?
If you filled out the IRS W-4 form, which provides directions for your employer about how much to withhold from each paycheck, you might not need to pay estimated taxes. If you aren’t a W-4 salaried employee, however, you probably need to keep estimated tax payments on your radar. According to the IRS, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when your return is filed, and if your employment type falls into one of these categories:
- Independent contractor or freelancer
- Sole proprietor
- S corporation shareholder
There are other sources of income that fall under the estimated tax umbrella, including:
- Dividends and interest earned from investment sales
- Royalties for past work
- Landlord rental income
- Unemployment benefits
- Retirement benefits
- Social Security benefits, if you have other sources of income
- Prizes and awards
You may also need to pay estimated tax as a full-time employee if your employer isn’t withholding enough from your salary. To update your W-4 with the correct withholding amount, use the IRS Tax Withholding Estimator tool, complete a new W-4, Employee’s Withholding Allowance Certificate form and submit it to your employer.
Estimated taxes are due, regardless of whether you’re paid by direct deposit, check or digital payment services like PayPal, CashApp, Zelle or Venmo. Note: While you should be paying taxes on that income already, a new rule under the American Rescue Plan requires third-party payment networks to report $600 or more payments to the IRS.
How do I calculate estimated tax payments?
There are a few ways to calculate your quarterly tax payments depending on your business model and annual earnings.
- If you earn a steady income, estimate the tax you’ll owe for the year and send one-fourth to the IRS each quarter. For instance, let’s say you’ll earn $80,000, which places you in the 22% marginal tax bracket. You’ll owe $17,600 in federal taxes or $4,400 each quarter in 2022.
- If your income varies throughout the year, you can estimate your tax burden based on your income and deductions in the previous quarter. The IRS Estimated Tax Worksheetcan help you do the math.
If you’ve overestimated your earnings at the end of the year, you can complete a 1040-ES form to receive a refund or apply your overpayment to future quarterly taxes. If you underpaid, the form could help you calculate what you still owe.
How do I pay my estimated taxes?
When filing your estimated taxes, use the 1040-ES IRS tax form or the 1120-W form if you’re filing as a corporation. You can fill out the form manually with the help of the included worksheets, or you can rely on your tax adviser to walk you through the process and get the job done. From there, you can pay your federal taxes by mail or online through the IRS website. You’ll also find a complete list of accepted payment methods and options, including installment plans.
Do I also have to pay estimated state taxes?
It depends. If you live in one of the few US states with no income tax, your responsibility ends with the estimated federal taxes we’ve discussed. However, if your state does levy income taxes, you will make estimated tax payments using the same deadlines for federal taxes. Visit your state’s department of revenue website for more personalized information.
What are the penalties if I don’t pay my estimated taxes?
It’s a good idea to post a calendar reminder as the quarterly deadline approaches to avoid paying a late penalty. You may be charged a penalty if:
- If you owe more than $1,000 in taxes after subtracting withholdings and credits.
- If you paid less than 90% of the tax for the current year through estimated taxes.
The penalty could be waived in some situations. If you want to delve further into estimated tax penalties and conditions of a waiver, see the instructions in IRS form 2210.
Can I avoid paying estimated taxes if I live in Spain?
You can avoid paying estimated taxes as a self-employed if while in Spain you are paying “Autonomos”, that according to the Totalization Agreement between the Social Securities of both countries, you can avoid paying Self-employment Tax, so in most cases the amount you can estimate you will owe the IRS in the Tax Return will be cero. In Spain, the tax rate is much higher than in the U.S.A., and the CTC will cover all the taxes that you are supposed to pay in the U.S.A.
If you have any further questions or doubts, please do not hesitate to contact us. US Tax Consultants. Phone +34 915 194 392 you can also wath the folowing video from the IRS: Estimated taxes