The United States has a pay-as-you-go system for the collection of income taxes. Most individuals see this concept in action automatically, when their employer withholds taxes from each paycheck. For those who are self-employed or receive a large cash payment from a one-time financial event, there is usually no automatic income tax withholding. But Uncle Sam doesn’t have to wait long to get his money because of the quarterly estimate tax payment requirement.
What Are Quarterly Estimated Tax Payments?
Quarterly estimated tax payments are made at quarterly intervals throughout the year. What a typical employer does every two weeks, the self-employed individual must do every three months, i.e. take a portion of the income earned and send it to the IRS.
When Are These Quarterly Estimated Tax Payments Due?
Each quarterly tax payment is due in April, June, September and January. For the 2016 tax year, the exact dates are:
- First payment: April 18, 2016
- Second payment: June 15, 2016
- Third payment: September 15, 2016
- Fourth payment: January 17, 2017
When Are Quarterly Estimated Tax Payments Required?
Generally, an individual is required to make quarterly payments if:
- They expect to owe at least $1,000 in taxes in the 2016 tax year, and
- Any income tax withholding and tax credits for the 2016 year add up to less than either:
- 90% of tax due for the 2016 year, or
- 100% of the tax due for the 2015 year
For most people, this means quarterly tax payments are required if at least 90% of their income taxes aren’t already being withheld and automatically paid to the IRS.
For example, let’s say a taxpayer makes $50,000 in 2016, will owe $5,000 in taxes, but the taxpayer’s employer only withholds $4,800. When the taxpayer files taxes in early 2017, they will owe the IRS that $200 difference. In this situation, the taxpayer doesn’t need to make quarterly tax payments for the $200 difference.
But let’s change the hypothetical: the taxpayer now has a side job that pays $15,000 per year, with nothing of that income being withheld. Let’s also assume the tax bill for the year will be $7,000. Total income is now $65,000, but the taxpayer is still only paying $4,800 throughout the year due to the employer’s withholding. The $4,800 is less than 90% of the taxpayer’s total tax bill of $7,000. The taxpayer will now be required to make quarterly estimated tax payments.
How Much Does Each Quarterly Estimated Tax Payment Need To Be?
There are a host of filing status, what taxes were paid in the prior year and how much of the taxpayer’s income is being withheld.
The goal is for each payment to be 25% of what the taxpayer will owe for that tax year. To help taxpayers calculate their quarterly estimated tax payments, the IRS has released Form 1040-ES.
How Are Quarterly Estimated Tax Payments Filed?
Payments can be made electronically, via telephone or by mail. The IRS provides detailed payment information at the Payments section of their website.
What Happens If the Quarterly Estimated Tax Payments Aren’t Paid, Underpaid or Filed Late?
If payments aren’t made properly, the IRS may impose a penalty, which is essentially an interest charge. The exact amount of the penalty will depend on many factors and is subject to exceptions. Also, the taxpayer should not skip quarterly payments hoping to pay more at the next installment. Not only might this lead to a penalty, but many taxpayers will find it difficult to get twice the amount of cash necessary to make up for the missed prior payment.
Because the above information barely scratches the surface of when and how quarterly estimated tax payments are made, the advice of a tax professional is recommended. This is particularly true for complex situations or for taxpayers who want to make extra sure they avoid any tax penalties.