INDIVIDUAL TAX | 08/15/2024
Estimated tax payments ensure individuals who don’t have sufficient federal taxes withheld throughout the year contribute their fair share. These payments apply if your income comes from sources such as interest, dividends, self-employment, capital gains, pensions, or other non-withheld income.
If you need to make estimated tax payments, understanding the rules and deadlines is crucial to avoid penalties.
Who Needs to Pay Estimated Taxes?
Individuals must make estimated tax payments if they do not have enough federal tax withheld from sources like wages or other payments. This often applies to those receiving income from:
- Interest and dividends
- Self-employment earnings
- Capital gains
- Pensions or other non-withheld income
Payment Deadlines
Estimated taxes are generally paid in four installments using Form 1040-ES. Payments must be made by:
- April 15
- June 15
- September 15
- January 15 of the following year
If a due date falls on a weekend or holiday, payments are due on the next business day. For example, the third 2024 installment is due Monday, September 16, because September 15 falls on a Sunday.
How Much Should You Pay?
The required annual payment is the lesser of:
- 90% of the current year’s tax liability, or
- 100% of the previous year’s tax liability (110% if your prior year’s adjusted gross income exceeded $150,000, or $75,000 for married individuals filing separately).
To calculate each installment:
- Divide the required annual payment by four and pay in equal amounts.
- Alternatively, use the annualized income method if your income varies significantly throughout the year, such as in seasonal businesses. For example, no estimated payment would be required before September 15 if your income is earned exclusively during June, July, and August.
Avoiding the Underpayment Penalty
Failing to make required payments can result in an underpayment penalty, calculated as the IRS interest rate on deficiencies multiplied by the underpaid amount for the period of underpayment.
However, the penalty does not apply if:
- Your total tax liability is less than $1,000 after subtracting withholding taxes paid.
- You had no tax liability in the prior year, were a U.S. resident or citizen, and the year was 12 months long.
- You file your return by January 31 and pay any remaining tax by that date.
- You are a farmer or fisherman who pays the entire estimated tax by January 15 or files your return and pays the tax by March 1.
The IRS may also waive penalties for:
- Reasonable cause due to casualty, disaster, or unusual circumstances.
- Reasonable cause during the first two years after reaching age 62 or becoming disabled.
How We Can Help
Navigating estimated tax payments can be challenging, especially with varying income or complex rules. Our team of tax professionals can help you:
- Determine whether you’re required to make estimated payments.
- Calculate accurate payment amounts to avoid penalties.
- Explore strategies for optimizing cash flow and minimizing tax liabilities.
Contact us today for guidance tailored to your financial situation and to ensure compliance with estimated tax rules.