As a Business-of-One, there’s no doubt that taxes can be confusing. From keeping track of income and deductions to submitting quarterly estimates, there’s no shortage of paperwork and attempts to interpret the tax code.
In this post we’ll break down what estimated taxes are and everything you need to know about calculating estimated tax payments, how and when to submit them and what happens when you miss a payment. Read on for more practical insights to keep your estimated taxes in check.
What are estimated taxes and why are they important?
Estimated taxes are the quarterly prepayments of your tax bill. Depending on your situation, quarterly estimates may be necessary to supplement your W-2 withholdings. While W-2 withholdings come out of every paycheck to cover the tax assessed on your salary, estimated taxes are submitted quarterly and are intended to cover any remaining balance of your expected tax bill. The remaining balance for your tax bill could be attributed to other sources of income, like your partner’s business income or investment income.
Submitting estimated tax payments are important for two reasons:
- They reduce the chances of a large tax bill come April
- They help you avoid potential underpayment penalties and interest
Now, don’t worry, not everyone has to deal with estimated taxes. But, for those who are self-employed, freelancers, or have a side gig that doesn’t withhold taxes, staying on top of your estimated taxes can be a total game-changer. Think of it as a way to keep your finances in check and Uncle Sam happy, all while preventing any unexpected tax surprises. Trust us, it’s worth the effort!
How to calculate estimated tax payments
Trying to figure out if you need to pay estimated taxes can feel a bit daunting. The IRS instructions have some confusing calculations to determine if you need to pay estimated tax payments (let’s just say percentages are involved), so let’s explore a few high-level questions first to see if you need to consider paying estimated taxes:
- Look at your total income from last year’s tax return. Do you expect to make more money this year?
- Do you have self-employed income or other income sources that aren’t subject to withholding (like rental properties, crypto gains, retirement distributions, sold your main house, etc.)
If you answered yes to either (or both) of these questions, estimated taxes will probably be a good idea. Here’s a shortcut version to determine your estimated tax payment amount (and yes, you will have to do some maths, but nothing a simple spreadsheet can’t handle):
- Figure out how much money you’ll make this year and include any adjustments and deductions (in other words find your taxable income)
- Calculate your tax liability (this is your taxable income multiplied by tax rate)
You don’t have to guess your tax rate. There are a lot of publications that issue updated tax brackets that will work just fine for estimated tax purposes. Here’s a good one from Nerd Wallet but there’s also the less-fun-to-read IRS website. This example is a couple filing jointly with $135,000 of taxable income. This puts them in the 22% tax bracket
- Total up the payments you’ve already made this year (this could include annualized* withholdings from wages, last year’s overpayments and year-to-date estimated tax payments)
*Annualizing your estimated W-2 withholdings means calculating the total amount of taxes that will be withheld from your paycheck over the course of a full year, based on the amount withheld from a single paycheck. To annualize your estimated W-2 withholdings, you would simply multiply the amount of taxes withheld from a single paycheck by the number of pay periods in a year.
- Subtract your total payments from your estimated tax liability.
If your payments are more than your estimated tax, you’re covered. If your payments are less than your estimated tax, divide the balance by four and that’s what you can expect to pay quarterly.
Pro tip: Round up to the nearest hundred. Submitting clean, rounded payment amounts can make your payments easy to identify on a bank statement and pad your estimate for minor variances that you might not have accounted for. In this example, you can round up to $3K each quarter.
If you live in a state with income tax, you’ll likely have to follow this process for the state, too. You can use Google for a quick check on your state’s tax brackets. Then you’ll repeat this process but switch out the tax rate and deduct your state’s withholdings.
Et voilà! You’ve calculated your estimated tax payments.
When to pay estimated taxes
Estimated tax payments are due quarterly throughout the year for U.S. taxpayers. The due dates are on or around the dates below (occasionally adjusted for holidays or weekends):
- April 15th
- June 15th
- September 15th
- January 15th of the following year.
What happens if you don’t pay estimated taxes on time
If you miss a payment, you won’t go to jail, but the IRS may impose underpayment penalties and interest. While estimates will help you stay on track to avoid a large bill at the end of the year, missing or intentionally skipping a payment isn’t the end of the world.
If you need to skip a payment (because life) or you just forget (also, because life), just make a note on your calendar to double up or pad your next estimated payment. Sometimes the penalties and interest, if you’re even subject to them, are inconsequential compared to having your cash on-hand when you need it.
Most states with income tax will follow the federal due dates, but it’s not a bad idea to double check with your state and add those to your calendar, too.
TLDR; if you miss a payment, there’s time to make up for it. If you go a full year without making any estimates, the worst case scenario is a large tax bill with penalties and interest added.
How to pay estimated taxes
Although seeing the cash leave your checking account is arguably more difficult, you’ve already completed the hardest part of this process by calculating your estimated tax payments. The next part is much easier.
With the estimated payments calculated and the due dates on the calendar, you’re one step closer to wiping your hands clean of this debacle.
If you prefer paper (we won’t judge, but going digital also means faster processing times and less chance of your payment getting lost in the mail), you can mail a check to the government with a printed tax voucher.
Mailing tax vouchers are a tried-and-true, old-school option to submit your payments, however explore this option with caution. Check washing schemes are on the rise – fraudsters will steal checks from mailboxes and use chemicals to erase or alter the information on the check, such as the payee and the amount.
The fraudsters then deposit the check into their own bank account and steal the money intended for the original payee. If you go this route, it’s best to use secure mailboxes or go straight to the post office for important financial docs, and keep a close eye on your bank account for any suspicious activity.
Alternatively, you can opt for the IRS Direct Pay platform or Electronic Federal Tax Payment System (EFTPS).
Pro Tip: When you submit online, make sure you select the correct tax period! This will be the tax year the IRS/state applies your payment to.
Regardless of how you pay, it’s important to keep records of your estimated tax payments, including the amount, date paid and payment method. If you live in a state with income tax, make sure your records specify if it’s a federal or state payment.
Paying Estimated Taxes FAQ
What are estimated taxes?
Estimated taxes are the quarterly prepayments of your tax bill. They are payments submitted throughout the year, which can supplement W-2 withholdings if you also have a regular salary.
If you’re self-employed and have no withholdings, the estimates are key to paying into your tax bill throughout the year. Paying in quarterly mimics what withholdings do for your tax return – meaning you pay into your tax bill throughout the year. This helps avoid a large balance due at the end of the year and can reduce the chance of penalties and interest.
Who has to pay estimated taxes?
Not everyone has to deal with estimated taxes, but they are important for those who are self-employed, freelancers, or have a side gig that doesn’t withhold taxes. If you have self-employed income or other income sources that are not subject to withholding, you’ll probably need to pay estimated taxes.
When are estimated taxes due?
Estimated tax payments are due quarterly throughout the year for U.S. taxpayers. The due dates are on or around April 15th, June 15th, September 15th, and January 15th of the following year.
How do I calculate my estimated taxes?
To calculate your estimated taxes, there are four steps:
- Figure out how much money you’ll make this year and subtract any adjustments and deductions to get to your taxable income.
- Calculate your tax liability by multiplying your taxable income multiplied by your tax rate.
- Total the tax payments you’ve already made this year.
- Subtract your total payments from your estimated tax liability.
If your total payments (estimates plus withholdings) are more than your estimated tax, you’re covered. If your total payments are less than your estimated tax, divide the balance by four, and that’s what you can expect to pay quarterly.
How do I pay my estimated taxes?
You can pay your estimated taxes online, by phone, or by mail. The IRS website provides various payment options like IRS Direct Pay or Electronic Federal Tax Payment System (EFTPS).
If you live in a state with income tax, you can find your state’s payment options through the government website.
Are there any penalties for not paying estimated taxes?
In addition to a higher balance owed when you file your tax return, the IRS may impose underpayment penalties and interest for any missed or skipped payments.
The TL;DR on estimated tax payments
Now you have the knowledge to tackle estimated tax payments head-on (or with a support system, like Collective). Knowing how, why and when to pay them is key, so be sure to add these deadlines to your calendar.
We know there’s a learning curve, but in the end, understanding the basics can save you from unnecessary stress and headaches (and large tax bills) in the future.
Just remember the basics: estimate early and often, pay on or before each deadline to avoid interest and penalties, use reasonable estimations when calculating taxes owed and make sure you keep record of all the payments you’ve made. Now you can walk into the next tax season with your head held high.
Marissa Achanzar is part of the sales team at Collective and doubles as a content writer based in Roseville, California. After a successful seven-year-stint in public accounting, Marissa decided to pivot and put her tax compliance and client engagement experience to use by creating practical, people-first educational content.
Marissa is also the founder of Something Good Co., a non-profit that supports foster and at-risk youth in the Sacramento region. In her spare time, she enjoys exercise, trying out new recipes, dabbling on piano or guitar and won’t say no to a good TV/movie marathon. You can find her on LinkedIn or contact her at [email protected]