By paying anticipated taxes, you can help prevent owing the Internal Revenue Service (IRS) a large chunk of money at filing time—or, worse still, incurring penalties. If a taxpayer receives certain forms of income that aren't subject to tax withholding, they should think about making anticipated tax payments. Self-employment income, rental income, investment income, and capital gains are a few examples. Even if you don't have any of these sources of income, you might want to think about paying anticipated taxes. The payments may also be used to pay taxes that you may owe but have not deducted from your unemployment benefits or other income.
Main points
- The IRS mandates that certain taxpayers make anticipated tax payments in order to pay as they go since it doesn't want to wait until the end of the year to collect the taxes you owe.
- Because taxes are already deducted from their paychecks, W-2 employees are exempt. However, individuals are free to submit projected payments if they so choose, perhaps in the event that they believe their W-2 withholdings won't cover all of their taxable income.
- If it's likely that you'll owe the IRS $1,000 or more when you submit your tax return, the usual rule of thumb is that you should pay estimated taxes.
Who Is Liable for Paying Estimated Taxes?
You may pay estimated taxes unless prohibited by law or regulation. If an unexpected event occurs during the tax year that makes you believe that the taxes being deducted from your paychecks may not be sufficient, you can increase the amount. If you wind up paying too much in taxes, the IRS will send you the excess as a tax refund. The IRS, however, establishes standards for which taxpayers are typically required to make estimated payments. The rule states that you must do this if you anticipate owing $1,000 or more on your tax return.Estimated Due Dates for Tax Payments
Every quarter of the year, estimated tax payments are required. If you pay after these dates, penalties and interest may be assessed.- April 15:
- June 15
- 15 September
- 15 January
The proposed tax fine
If you don't pay enough by the quarterly due dates and it turns out that you should have when you file your tax return, the penalty for unpaid estimated taxes usually applies. If you've made anticipated payments of at least 90% of what you owe for the current year or 100% of the total tax owing on your prior year's return, whichever is less, you can typically avoid paying a penalty if it turns out that you owe less than $1,000 when you file. In essence, the fine is an interest charge. Each quarter, the IRS determines the rate by adding three percentage points to the federal short-term rate. Individual taxpayer underpayment interest for the fourth quarter of 2021 is set at 3%. 3. In the first quarter of 2022, it stays the same. From the time the payment was due until the day the tax was paid, interest usually accrues daily and is applied to any unpaid taxes.How to Figure Out Your Taxes
Look at your tax return from the previous year to determine your total tax burden, then take any withholding from other sources of income that you have already paid for this year or that you anticipate paying this year. If your withholding will be roughly the same as last year, you can deduct that amount. You will owe taxes on the remaining amount of income. To calculate your quarterly projected tax payment, divide any anticipated withholding deficiency by 4. If you want to send in your expected payments on a monthly basis, divide by 12 If there haven't been any significant changes since last year, this approach will work. You're making roughly the same amount of money, and it's likely that you'll maintain your existing marital status and number of dependents for the duration of the tax year. If you're starting to make projected payments later in the year, divide by the number of quarters or months left in the tax year. Worksheets are available in IRS Publication 505 and Form 1040-ES to assist you in estimating your anticipated tax liability. If you've gone through several major changes, using these worksheets may be your best bet.How to Determine Your Income
Consider a scenario in which you are an independent contractor and your business is your sole source of income. In the first quarter (three months) of 2022, you make $25,000 from self-employment, offset by $7,500 in business expenses, for a net profit of $17,500. Since there is no seasonality in your firm, it is reasonable to assume that your revenue and outgoing costs will remain constant for the next nine months of the year. Your net quarterly profit of $17,500 multiplied by four results in a net annual profit of $70,000. Because you're an independent contractor, your income will be liable for both income tax and the self-employment tax. Consequently, your taxable income for the year would be as follows:- Self-employment tax: $9,890 ($70,000 multiplied by 0.9238 and 15.3%)
- $4,945 is the deduction for the self-employment tax.
- A single person's standard deduction is $12,9505.
- Taxable income is equal to $52,655 ($70,000-$4,945-$12,400).
Making an estimate of your payments
We can determine your projected income tax using the single tax brackets for 2022 as follows:- 10% of your gross revenue up to $10,275 equals $1,027.
- Your earnings from $10,276 to $41,775 divided by 12% equal $3,780.
- Your income increased by 22 percent from $41,776 to $52,655.
- The total projected income tax resulting from these sums is $7,203 ($1,027 + $3,780 + $2,396).
- The sum you should pay in expected payments over the year is $17,093, which is the result of adding this predicted income tax to your $9,890 self-employment tax. This amounts to $4,273 in estimated quarterly taxes, or $1,424 if you prefer to pay monthly.
How to Make Estimated Tax Payments
You can send estimated payments by check, credit card, or through one of the online bill payment services provided by the Treasury Department.Check payment
Make your check payable to the "Treasury of the United States." In the memo section of the check, make sure to include your Social Security number and the year you are paying. As an illustration, you may type "2022 Form 1040-ES, 123-45-6789." The payment vouchers that are included with Form 1040-ES must be used. Send a Form 1040-ES voucher and your check to the IRS. On its website, the IRS posts a list of addresses that varies according to the state of residency.Using a credit card to pay
Direct debit and credit card payments are accepted by the IRS thanks to the Taxpayer First Act. This option is available on the Payments page of the IRS website. The cost of this service varies. Credit card payments start at 1.87 percent and debit card payments start at $2.20.When you click to pay, you can select the payment method that best meets your needs.The Federal Electronic Tax Payment System
Additionally, two internet payment systems are run by the US Treasury Department. The Electronic Federal Tax Payment System (EFTPS) is one of them. To use this option, you must register and create an account. But after that, you can just choose the amount and the date you want the payment to be taken out of your bank account. Users of EFTPS have the option to print a report that details their annual projected payments, which is helpful to have around tax time. New enrollments may take a few days to process, but once you're set up, you may immediately schedule anticipated payments from your bank account.The IRS Direct Pay
Direct Pay is the Treasury Department's second online payment option. It is solely intended to be used for personal income tax payments. But most independent contractors fall within this category. Although there is no enrollment or registration process for this service, you will need to submit your personal data each time you want to make a payment. You can schedule federal tax payments from a checking or savings account via EFTPS and Direct Pay, respectively. Option 2: Withdraw additional funds from other sources of income. If you have additional income that is subject to withholding, you can change the amount withheld from your paychecks to pay for estimated taxes on additional income. To tell your employer how much more tax you want deducted from your normal pay, fill out a new Form W-4. You can specify an extra sum of money that your company should deduct from each paycheck. No justification is necessary.Questions and Answers (FAQs)
What are the expected payments for state and local taxes? You need to be concerned about more than just your federal anticipated tax payments. In most states, you'll also need to make projected payments for state income taxes and, in certain circumstances, even for local taxes. Check with your state tax department and, if necessary, seek advice from a tax expert, as state deadlines and regulations can differ. To whom do I send payments for estimated taxes? If you choose to pay your estimated taxes by mail, make sure to include the correct address for your tax jurisdiction. Check your state's tax authority's postal address as well as the IRS's list of addresses.