Estimated Taxes
Content provided for general information. Talk to your advisor to learn about recent updates or other rules that may apply to your situation.
Most people think of April 15th as the due date for taxes, but the reality is that the IRS wants its cut as soon as you get paid. If your income isn’t covered by income tax withholding, you need to make estimated tax payments.
Estimated Tax Requirements
Who has to pay estimated taxes?
You need to pay estimated taxes if you will owe $1,000 or more when you file your tax return. You may not need to pay estimated taxes if you had no income or tax liability the previous year, but it’s good to do anyway to avoid a surprise tax bill.
Common reasons for having to pay estimated taxes include running your own business or having a gig economy side gig that classifies you as an independent contractor.
What income requires quarterly tax payments?
Estimated tax payments cover your total tax liability. Therefore, you should consider all of your income when calculating your estimated tax payments. This includes:
- Wages (usually covered by employer withholding).
- Self-employment income.
- Farming and fishing income.
- Bank interest.
- Investment dividends and capital gains.
- Taxable alimony.
State Estimated Taxes
States also have their own estimated tax rules, so unless you’re in a state with no income tax like Texas, don’t forget to check the estimated tax rules for your state.
When are estimated taxes due?
Federal estimated taxes for calendar year filers are due in quarterly installments on the following dates. States usually follow a similar calendar.
| Action Needed | 2022 Tax Year | 2023 Tax Year |
|---|---|---|
| First Quarter Estimated Tax Payment Due | April 18, 2022 | April 18, 2023 |
| Second Quarter Estimated Tax Payment Due | June 15, 2022 | June 15, 2023 |
| Third Quarter Estimated Tax Payment Due | September 15, 2022 | September 15, 2023 |
| Fourth Quarter Estimated Tax Payment Due | January 17, 2023* | January 16, 2024* |
| Receive Your 1099 | No later than January 31, 2023 | No later than January 31, 2024 |
| File Your Tax Return | Tuesday April 18, 2023 (15th is a Saturday; Monday is Washington, D.C., Emancipation Day) | April 15, 2024 |
| Extended Filing Deadline | Monday October 16, 2023 (15th is a Sunday) | October 15, 2024 |
Note that the middle of the month deadlines are usually on the 15th but may extend by a day or two if it falls on a weekend or federal holiday.
The easiest way to make estimated tax payments is to make four equal payments on those dates. If you don’t pay the full installment by the quarterly due date, you’ll owe an underpayment of estimated tax penalty.
The estimated tax penalty is smaller than the penalty for not paying in full by your tax return due date, and some people view it as a reasonable interest rate to wait to pay until April 15th. However, depending on your level of financial discipline, you may find it easier to go ahead and pay to avoid being short on funds later.
Calculating Estimated Tax Payments
How much should your estimated tax payments be?
Your estimated tax payments depend on your income and business type. You need to make sure your payments add up to a certain percentage of your current or prior year’s income.
The default rules for most people are as follows.
| Based on Current Year Tax Return | Based on Prior Year Tax Return | |
| AGI up to $150,000 ($75,000 if married filing separate) | 90% of current year taxes | 100% of prior year taxes |
| AGI over $150,000 ($75,000 if married filing separate) | 100% of current year taxes | 110% of prior year taxes |
| Based on Current Year Tax Return | Based on Prior Year Tax Return | |
| AGI up to $150,000 ($75,000 if married filing separate) | 90% of current year taxes | 100% of prior year taxes |
| AGI over $150,000 ($75,000 if married filing separate) | 100% of current year taxes | 110% of prior year taxes |
Most people make four equal payments.
If your income is uneven, you can annualize your income to match your estimated tax payments to when you actually earned the income. This requires extra paperwork and usually isn’t worth it unless your income is highly variable.
You’ll probably want to use QuickBooks for independent contractors or similar software to track your net profit so you know what you’ll have to pay taxes on.
Special Situations
If at least 2/3 of your income is from farming or fishing, you can avoid estimated tax penalties by paying either 2/3 of your current year’s tax or 100% of your previous year’s tax.
If you have a household employee, such as a nanny, include his or her household employment taxes when calculating your estimated tax payments.
How do you calculate estimated tax payments if you have withholding at a W-2 job?
If your employer withholds income tax, that withholding counts towards your estimated tax obligation. That’s why most employees don’t have to worry about estimated tax payments.
If you have a side job or rental property that only makes up a small portion of your income, you may be able to increase your withholding to avoid having to make a separate estimated tax payment.
To figure your estimated tax payments when you have withholding, take your total tax liability, subtract your expected withholding, and the difference is your estimated tax payment.
Is it better to use this year’s or last year’s income when making estimated tax payments?
It is almost always easier to use last year’s income because all you need to do is divide the tax liability on your last tax return by four and make four equal payments. However, this method could leave you short if your income increases.
To avoid this, use a tax calculator to estimate your current tax year liability and either set aside the additional amount in a savings account or make an extra estimated tax payment.
If your income decreases, you have the option to switch to the current-year method later in the year.
What if you pay too much?
If you pay too much because your income went down or you overestimated how much you need to pay, you can receive a refund when you file your final tax return just like you would if your employer withheld too much. You can also opt to apply your refund to your estimated payments for the next tax year.
There is no way to get an early refund if you significantly overpay your estimated taxes. If your income is unpredictable, you may want to make estimated payments based on your current year income.
Do you get interest if you paid too much earlier in the year?
Even though the IRS charges interest for paying late, it doesn’t pay interest for early payments. The only thing paying early lets you do is reduce your payments in the remaining quarters. For example, if you need to pay $10,000 in estimated taxes, you need to have paid:
- $2,500+ (25% of what you owe) by April 15th
- $5,000+ (50% of what you owe) by June 15th
- $7,500+ (75% of what you owe) by September 15th
- $10,000+ (100% of what you owe) by January 15th
It doesn’t matter if you pay evenly or pay more early. You can pay 100% in the first quarter and 0% for the rest of the year. You just need to have covered at least 25% each quarter.
How to Pay Estimated Taxes
The IRS has a number of payment options.
The easiest option is to set up an account with EFTPS because you can schedule your payments in advance and have them automatically withdrawn from your bank account on the due date. Note that the initial EFTPS setup takes a few weeks because the IRS sends a PIN by mail that you must have to log in to your account.
You can also make a one-time payment on the IRS website from your bank account, debit card, or credit card. Some credit cards even have higher rewards than the credit card fee.
To make payments by mail, fill out Form 1040-ES and send your payment along with the payment voucher to the address listed on the form.
Note: You don’t need to submit Form 1040-ES with your online payment. The form is only to help you calculate your estimated tax payments. When you mail a payment, the vouchers help the IRS identify your payment. When you pay online, the online system asks what the payment is for.
What’s the address for estimated tax payments?
The IRS has several addresses for estimated tax payments based on where you live.
| Where You Live | Send To |
|---|---|
| Alabama, Arizona, Florida, Georgia, Louisiana, Mississippi, New Mexico, North Carolina, South Carolina, Tennessee, Texas | Internal Revenue Service P.O. Box 1300 Charlotte, NC 28201-1300 |
| Arkansas, Connecticut, Delaware, District of Columbia, Illinois, Indiana, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Missouri, New Hampshire, New Jersey, New York, Oklahoma, Rhode Island, Vermont, Virginia, West Virginia, Wisconsin | Internal Revenue Service P.O. Box 931100 Louisville, KY 40293-1100 |
| Alaska, California, Colorado, Hawaii, Idaho, Kansas, Michigan, Montana, Nebraska, Nevada, Ohio, Oregon, North Dakota, Pennsylvania, South Dakota, Utah, Washington, Wyoming | Internal Revenue Service P.O. Box 802502 Cincinnati, OH 45280-2502 |
| A foreign country, American Samoa, or Puerto Rico (or are excluding income under Internal Revenue Code 933), or use an APO or FPO address, or file Form 2555 or 4563, or are a dual-status alien or nonpermanent resident of Guam or the U.S. Virgin Islands | Internal Revenue Service P.O. Box 1303 Charlotte, NC 28201-1303 |
| Guam: Bona fide residents | Department of Revenue and Taxation Government of Guam P.O. Box 23607 GMF, GU 96921 |
| U.S. Virgin Islands: Bona fide residents | Virgin Islands Bureau of Internal Revenue 6115 Estate Smith Bay Suite 225 St. Thomas, VI 00802 |
What’s the best way to handle quarterly tax payments?
- Open a savings account just to hold the money you’ll use for estimated taxes.
- Divide your previous year’s tax liability by 52 and schedule weekly transfers from your checking account into this savings account. Don’t forget to make a catch-up transfer if you set this up after January 1st.
- Use EFTPS to automatically withdraw your quarterly estimated tax payments from the savings account. The withdrawal should be 25% of your previous year’s tax liability.
- You’ve now met your estimated tax obligation by paying 100% of your previous year’s tax liability. (If you’re required to pay 110%, set your quarterly payments to 27.5% instead.)
If your income goes up or your deductions are lower, you’ll have a small April 15th tax bill, but you won’t have to pay a penalty.
How to Pay Quarterly Taxes for an LLC
Most LLCs give you pass-through taxation. That means you pay taxes on your business income on your personal tax return.
If your LLC taxes go on your personal tax return, follow the usual estimated tax rules.
If you elected to have your LLC taxed as a C-corporation, follow the C-corporation tax rules.
Don’t forget that your LLC may need to pay other taxes during the year such as payroll taxes or sales tax. These taxes are usually separate from your estimated taxes.
What happens if you don’t pay estimated taxes?
If you don’t pay estimated taxes, there are two possible penalties depending on when you actually pay.
Missed or Late Quarterly Payment
The underpayment of or failure to pay estimated tax penalty applies between the estimated tax payment due date and your tax return filing due date. This is an interest charge. The rate is about 2-3% higher than the current federal funds rate depending on rounding and when it was last changed.
Not Paying By Your Filing Deadline
The failing to pay penalty applies if you don’t pay your taxes by your tax return due date. The penalty is 0.5% per month of the outstanding balance. Interest charges also apply on top of this penalty.
Can you get an estimated tax penalty if you receive a tax refund?
You can owe a penalty for underpaying estimated taxes even if you’re getting a refund for overpaying your taxes. It comes down to the timing of your payments. There are four quarterly payments, and each payment can have a penalty.
Here’s the language from the IRS instructions.
When a Penalty is Applied
In some cases, you may owe a penalty when you file your return. The penalty is imposed on each underpayment for the number of days it remains unpaid. A penalty may be applied if you didn’t pay enough estimated tax for the year or you didn’t make the payments on time or in the required amount. A penalty may apply even if you have an overpayment on your tax return.
The penalty may be waived under certain conditions. See the Instructions for Form 2210 for details.
Let’s say you need to pay $10,000 in taxes. Paying $2,500 in April, June, September, and January will cover that. If you skip the April payment and then pay $4,000 in June, September, and January, you’ve paid $12,000 in total when you only needed to pay $10,000. But, you still had late payments that can create a penalty.
- As of Quarter 1 (April), you paid $0 and you’re $2,500 late on your estimated taxes.
- As of Quarter 2 (June), your $4,000 payment goes towards the $2,500 you should have paid in April and $1,500 for the June payment. You’re still $1,000 behind.
- You catch up in Quarter 3 (September) because your $4,000 payment covers both the $1,000 you’re behind on and $2,500 for September. You’re now $500 ahead.
Even though you again paid more than you needed to in January, you still had late estimated tax payments in Quarters 1 and 2.
For easy math (not exact numbers), I will call the penalty 1% per quarter (it varies with interest rates). 1% of the April late payment is $25, and 1% of the June late payment is $10. That’s $35 in penalties. So your tax refund amount is $12,000 in payments minus $10,000 in taxes owed minus $35 in estimated tax penalties. Instead of getting a $2,000 refund, you get $1,965 back.