Estimated Tax Payments
Episode 21: In this episode, Timalyn discusses the confusion she encounters with some business owners. This involves the question of why they owe taxes. Often, the issue involves estimated tax payments. This episode isn’t only for business owners. Individuals may also need to make estimated tax payments. In today’s episode, Timalyn will explain what these payments are, who should make them, how to make them and when they need to be paid.
Our Pay as You Go Tax System
In the US, we are on a pay-as-you-go tax system. The IRS prefers taxpayers don’t wait until the end of the year to pay a large tax bill. The system is set up to get you to pay as you earn your income.
For W-2 wage earners, you have a portion of your earnings withheld for taxes on each paycheck. The amount is typically determined by how you completed your IRS W-4 Form.
Business owners have the responsibility to submit your individual portion and the portion your employer would normally be responsible for (if you were still a W-2 employee).
How Often Are Estimated Tax Payments Made?
These payments are set up to be made on a quarterly basis.
Who Should Make Estimated Tax Payments?
Timalyn explains these are for sole proprietors and partners in a general or limited partnership. This includes people who do jobs like door dash or other service-related jobs such as insurance agents, Uber drivers, and others who receive a 1099.
Partners and shareholders are also required to make a quarterly tax payment, assuming you have a tax liability of $1,000 or more from your activities. The threshold is $500 for corporations. It has nothing to do with whether you typically receive a tax refund. Your tax liability and your tax refund are 2 different topics. To learn more about this, check out Timalyn’s blog post, “15 Tax Terms Every Tax Payer Should Know.”
Note: Timalyn is speaking about federal taxes, but states may also require estimated quarterly tax payments to be made. She recommends checking with your state’s Department of Revenue.
How Do I Calculate Estimated Quarterly Tax Payment Amounts?
Timalyn recommends hiring a tax professional to calculate these amounts. This service would typically not be included in a standard tax preparation fee.
For an individual, you can calculate them using IRS Form 1040-ES. You’ll also want to use IRS Form 1040-SE (“Schedule SE”), to estimate your self-employment tax. This will also provide you with your 4-Quarterly Cash Payment Vouchers, enabling you to pay your estimated quarterly tax payments via check.
For a corporation, use IRS Form 1120-W. This is the same process for calculating your projected income and estimating your quarterly payments.
Remember, you don’t need to submit the forms you used to calculate your payments. For federal payments, you only need to submit the form (and voucher) not the background information.
Timalyn has a video series on her YouTube channel, providing information about the W-4 and how to properly complete it, based on your situation. This information will also help you learn how to adjust your withholdings.
When Are Quarterly Estimated Tax Payments Due?
The first payment is due on April 15th, yes, the same due date as your previous year’s tax payments. The second payment is due on June 15th. The third payment is due on September 15th. The fourth payment is due on January 15th.
If the above dates fall on a holiday or weekend, the due dates roll to the following Monday.
How Do I Make Quarterly Tax Payments?
Timalyn explains you have several options for your federal payments. There is an online option via the EFTPS system. This is the Electronic Federal Tax Payment System.
You can sign up for an account at IRS.gov enabling you to make payments. In this YouTube video, Timalyn explains how to make a tax payment using your credit card or debit card. You can also read her blog post on how to make an online payment using your bank account.
Remember, you still have the option of mailing in your tax payment with a payment voucher. The mailing information is provided on the actual voucher.
You might consider using the IRS2Go app to make your tax payment.
The IRS also provides a pay-by-phone option, but there may be fees associated with this method.
What if I Don’t Make Estimated Quarterly Tax Payments?
You may decide to skip making these payments. The bottom line is that you will owe the IRS. It’s possible some life event may happen which might require you to use the money you set aside for your payment at the end of the year. Life happens. Making quarterly payments helps to avoid not being able to pay the IRS when the tax bill comes due. It’s always best to be proactive. If you fall far enough behind, you may eventually find yourself in a situation where the IRS issues a tax levy on your bank account.
Avoiding the Underpayment Penalty
In addition, because you didn’t make your quarterly estimated tax payments, you’ll also be required to pay an underpayment penalty. To avoid it, you need to make sure you’ve paid 100% of last year’s tax liability when you file. You may also be able to avoid it if you have 90% of the current year’s tax liability paid. The IRS can be lenient. If you’re in a pinch, pay whichever of the two amounts is smaller.
Did you know 1 in 50 taxpayers has an IRS tax issue?
There are many reasons this occurs. It could be confusion, maybe someone’s ignoring the problem, or any of a myriad of other root causes. You can help people by sharing this episode with your family and friends. Back taxes shouldn’t ruin your life or theirs either.
As we conclude Episode 21, we encourage you to connect with Timalyn on social media. You’ll be able to subscribe to this podcast on Spotify, Apple Podcasts, Google Podcasts, and many other podcast platforms.
Remember, Timalyn Bowens is America’s Favorite EA and she’s here to fill the tax literacy gap, one taxpayer at a time. Thanks for listening to today’s episode.
For more information about tax relief options, visit https://www.americasfavoriteea.com/ .
If you have any feedback, or suggestions for an upcoming episode topic, please submit them here: https://www.americasfavoriteea.com/contact.
Disclaimer: This podcast is for informational and educational purposes only. It provides a framework and possible solutions for solving your tax problems, but it is not legally binding. Please consult your tax professional regarding your specific tax situation.