Paying estimated taxes helps ensure that you are providing the Internal Revenue Service (IRS) with enough money throughout the year to avoid a large liability when filing your tax return – or, worse yet, incurring penalties. Taxpayers should consider making estimated tax payments if they are earning certain types of income that are not subject to withholding. This income can include self-employment income, rental income, investment income, and capital gains.
Who Needs to Pay Estimated Taxes?
Anyone can pay estimated taxes. You can do so if unexpected circumstances occur during the tax year that lead you to believe that the taxes being withheld from your paycheck may not be enough. The IRS will send you any overpayment as a tax refund if you end up paying too much.
Due Dates for Estimated Taxes
Estimated tax payments have quarterly due dates throughout the year. Penalties and interest can accumulate if payments are made after these deadlines: April 15, June 15, September 15, January 15.
Estimated Tax Penalty
The penalty for underpayment of estimated taxes usually applies if you have not made sufficient payments by the quarterly due dates and it turns out that when you file your annual tax return, you should have done so. You can generally avoid paying a penalty if it turns out you owe less than $1,000 when you file your return if you made estimated payments of at least 90% of what you owe for the current year or 100% of the total tax due on your prior year’s return, whichever is less.
How to Calculate Your Estimated Tax Payments
Look at your tax return from last year to see your total tax liability, then subtract any deductions you expect to claim or may have claimed this year from other income sources. You can deduct the amount of tax withheld from last year if the withholding is likely to be roughly similar. The balance is the amount your tax will be.
You can divide any expected shortfall in withholding by four to get your quarterly estimated tax payments. Divide by 12 if you prefer to make your estimated payments monthly.
This method works if you have not experienced any significant changes since last year. If you are earning approximately the same amount, and you are likely to have the same marital status and number of dependents throughout the current tax year.
Divide by the number of quarters or months remaining in the tax year if you are starting to make estimated payments later in the year.
How to Pay Your Estimated Taxes
You can send estimated payments by check or credit card, or you can use one of the electronic payment systems set up by the Treasury Department.
Paying by Check
Make the check payable to “U.S. Treasury.” Be sure to include your Social Security number and the year you are paying for in the memo field of the check. For example, you might write “2023 Form 1040-ES, 123-45-6789.”
Make sure to use the payment vouchers that come with Form 1040-ES. Send your check along with the 1040-ES voucher to the IRS. The IRS publishes a list of addresses on its website that vary by state of residence.
Paying by Credit Card
The taxpayer first law allows the IRS to accept direct payments and credit cards. You can find this option on the IRS electronic payment page. Fees for this service vary. They start at $2.20 for debit card payments and 1.85% for credit cards. You can choose the payment process that best suits your needs when you click to pay.
System
Federal Electronic Tax Payment
The U.S. Department of the Treasury also manages two online electronic payment systems. One is the Electronic Federal Tax Payment System (EFTPS). It requires you to register and create an account to use this option. But then you can simply specify the amount and the date you want to withdraw the payment from your bank account.
EFTPS users can print a report showing the estimated payments for the year, which is helpful for them during tax time. The system may take a few days to process new registrations, but you can quickly schedule estimated payments from your checking account once you’re set up.
IRS Direct Pay
The second online payment system offered by the Treasury is Direct Pay. It is designed to handle personal tax payments only. But this includes most self-employed individuals. This service does not require registration or sign-up, but you will need to enter your personal information each time you want to make a payment.
Both EFTPS and Direct Pay allow you to schedule federal tax payments from your checking or savings account.
Avoid Penalties by Withholding More from Other Income
You can adjust the tax withheld from your paycheck to cover the estimated taxes on additional income if you also have income that is subject to withholding. Fill out a new W-4 form to tell your employer the additional amount of tax you want withheld from your regular paycheck. You can specify an additional amount you wish to withhold from each paycheck. You don’t need to provide a reason.
Frequently Asked Questions (FAQs)
What are estimated state and local tax payments?
Federal estimated tax payments are not the only ones you need to worry about. You will also need to make estimated payments for state income taxes in most states, and even for local taxes in some cases. Deadlines and requirements can vary by state, so be sure to check with your state’s tax agency and consult a tax professional if necessary.
Where can I send my estimated tax payments?
Be sure to send the payment to the correct address for your tax authority if you are paying your estimated taxes by mail. Check the list of IRS addresses as well as the mailing address for your state tax authority.
Source: https://www.thebalancemoney.com/estimated-taxes-and-the-estimated-tax-penalty-3193117
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