Federal estimated tax payments are intended to ensure that certain individuals contribute their fair share of taxes throughout the year. If your federal tax withholding from paychecks and other income sources isn’t sufficient, you may need to make estimated tax payments. This applies if you receive income such as interest, dividends, self-employment earnings, capital gains, pensions, or other types of income not subject to withholding.
To avoid an underpayment penalty, individuals are required to pay 25% of their “required annual payment” by April 15, June 15, September 15, and January 15 of the following year. If any of these dates falls on a weekend or holiday, the payment is due on the next business day.
For 2024, the third installment is due on Monday, September 16, as the 15th falls on a Sunday. These payments are made using Form 1040-ES.
Calculating Amount Due
Most individuals need to make estimated tax payments based on either 90% of the current year's tax or 100% of the previous year's tax (110% if last year's income was over $150,000, or $75,000 if married filing separately). If most of your income comes from wages, taxes withheld from your paycheck usually cover these payments.
For those making estimated payments, the total amount due is divided into four equal installments, paid by specific due dates. However, if your income varies throughout the year (like with seasonal work), you might be able to make smaller payments using the annualized income method, which adjusts the payment schedule to match your income flow.
Penalties
If you don’t make the required payments, you may be subject to an underpayment penalty. To calculate your penalty amount, multiply the IRS interest rate for deficiencies by the underpayment amount for that period.
IRS Interest Rate x Underpayment Amount for that Period = Penalty Amount Owed
There are cases in which the underpayment penalty wouldn’t apply to you. If:
The total tax on your return is less than $1,000 (after withholding taxes are paid).
You were a U.S. citizen with no tax liability from the previous year (a full 12-month term).
By the fourth installment due date (Jan. 15th), you file your return by Jan. 31st and pay your taxes in full.
You're a farmer or fisherman and pay your entire estimated tax by Jan. 15th, or pay your entire estimated tax and file your tax return by March 1st.
Additionally, the IRS may waive the penalty if the underpayment was due to a casualty, disaster, or other unusual circumstances, and it would be unfair to impose the penalty. The penalty can also be waived for reasonable cause during the first two years after you retire (and are at least 62 years old) or become disabled.
Tax Clients, please reach out if you need help calculating your estimated tax payments or have any questions about how the rules apply to your situation. If you owe taxes, you’ve likely already been notified. If you haven’t yet discussed your options and payment schedule with one of our Tax Consultants, please contact them immediately or schedule an appointment.
Steve Julal steve.julal@vaasprofessionals.com
Milton Williams mwilliams@vaasprofessionals.com