What are estimated tax payments and do I need to make them?

“Estimated tax is a periodic advance payment of taxes based on the amount of income that is earned and the amount of estimated tax liability that will be incurred as a result. Estimated taxes are assessed on income that is not subject to any type of withholding, which includes self-employment income, dividend income, rental income, interest income, and capital gains.”

If you are a W2 employee, you do not need to make estimated tax payments. However, if you own your own business, or have other non-taxable income, you’ll want to keep reading. The IRS requires you to make these payments if you expect to pay $500 or more in taxes at the end of the year or $1,000 if you file as a sole proprietor or partnership.

As the name of payment would imply, you need to make these payments each quarter, so four times per year. First quarter payments are due by April 15, second quarter by June 15, third quarter by September 15, and fourth quarter payments are due the following year on January 15.  The payments are due quarterly but the time in which the payment covers isn’t an always exactly a quarter of the year. The first quarter payment due in April covers January 1 – March 31. The second quarter payment only covers April 1 – May 31. The third quarter payment covers June 1 – August 31, and the final payment that is due the following year covers the end of that year from September 1 – December 31. 

Okay, so that part is easy. Make your estimate payments on those dates each year. All you need to do is mark your calendar. So how much do you have pay? Do you have to pay the same amount each quarter? To figure your estimated tax, you need to figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for that year. Then you’ll divide this by four to make your quarterly payments and send it off to the IRS on the appropriate dates listed above. So even though the “quarters” aren’t equal quarters, you’ll want to make four equal payments throughout the year. Be sure to fill out form 1040-ES to send in along with your payment.

 It is also very important to make sure that you make these payments on time. If you fail to do so, you could end up paying fines on top of the payments owed. Don’t forget about your state tax payments!

Every person’s tax return is unique to them so while this is an overview of estimated tax payments, you should contact a tax professional to see if you have any special circumstances.