Quarterly Estimated Tax Payments

Are you a Self-Employed, Business Owner, or Recipient of income not subject to withholding? You may be subject to Quarterly Estimated Tax Payments!

Who must pay estimated taxes?

If you are an independent contractor, have your own business, or receive income such as interest, dividends, rents, or other types of income not subject to withholding, it is crucial that you understand your tax obligations. One of the most important is making quarterly estimated tax payments.

1. The first thing to keep in mind to know if you should make estimated payments during the year is whether you expect to receive income not subject to withholding. Simply put, if you receive or expect to receive income that does not come from a source such as a W-2, where someone retains part of this income and files these payments for you, this responsibility may fall on you.
2. Then, if you determine that you will receive income not subject to taxes, you should ask yourself the following question: Do you expect to owe more than $1,000 in taxes to the IRS for this year? So, if the answer is no, you don't have to worry as you won't incur penalties and interest charges. Now if the answer is yes, then you must make estimated payments throughout the year to the IRS to avoid incurring penalties and interest charges. These estimate payments will be made to the IRS on a quarterly basis and have deadlines that we will discuss below.

I Need to Make Quarterly Estimated Tax Payments. What's Next?

Continuing with the analysis, let's assume that you actually have to make estimated payments during the year to the IRS. Then you have two options to meet the requirements and not have penalties and interest charges at the end of the year.

Option 1: Using Previous Year's Tax Return for Quarterly Estimated Payments:

The first option is to use your tax return from the previous year. Then look up what your previous tax liability was, to do this look in your 2023, 1040 if you are estimating for the year 2024 and see line 24 "total tax". You divide this amount by 4 and this will be your estimated tax payments quarterly. This does not mean that you do not have to pay more than this amount at the end of the year. What this means is that if you fall short of your estimated quarterly payments you will not incur any penalties or interest charges. At the end of the year you will pay what you missed and what you paid extra will be returned to you. There is a special rule for higher income taxpayers, in this case if your adjusted gross income (AGI, 1040 form, line11) for the year 2023 was more than $150,000 ($75,000 is married filing separately) instead of using 100% use 110%.

Option 2: Estimating Current Year's Tax Liability for Quarterly Payments

The second option is to estimate what your tax liability will be for this year and you must pay at least 90% of what you estimate. This option is recommended if you have a clear forecast of how the year will behave and you expect to receive less income than the previous year and you do not want to pay extra during the year and wait until the end of the year for it to be returned to you. When you make these estimates you must fill out form 1040-ES. By following this link there is a powerful calculator that can help you with these calculations. I just want to remind you that you can use any credit that you know will reduce your tax liability such as the Child tax credit among others. Additionally, if you have another source of income from a W-2 job you can reduce what you know this job withholds from your payroll.

Helpful Link Calculator:  https://www.mortgagecalculator.org/calcs/1040-calculator.php

How to submit estimated tax payments to the IRS:

Now that you have calculated how much to pay during the year as quarterly estimated taxes, the other question you may have is how to submit these payments to the IRS, let's explore two options together.

• Utilizing a W-2 Job for Quarterly Estimated Tax Payments:

In case you have other sources of income from a W-2 job or you are married and you file your taxes with your spouse and he/she has a W-2 income. You can increase withholding from your W-2 job or that of your spouse. You can do this on the W-4 that you give to your employer.

• Making Separate Payments: Using IRS Direct Pay for Estimated Taxes:

Another way is to do it separately. You can go to the IRS website and visit the payments section. Then you select the "Pay Now with Direct Pay" button and then the "Make a Payment" button.

Once inside the Direct Pay screen select the reason for the payment, here you will need to select Estimated Tax. This will cause Apply payment to 1040-ES to be selected by default, you will be able to define the period for which the estimate is for. Then you will verify identity and fill out the fields with the information the IRS needs to identify you. Continue this five-step process and submit payments.

Hey there!

We get it – dealing with taxes can be a real headache. But don't sweat it! We're here to make your life easier. At Confidence & Profitable Accounting Solutions, we've got your back when it comes to those pesky tax payments. So why stress when you can let us handle it? Reach out to our team today and let's tackle this together, leaving you free to focus on what really matters to you.