If you own your own business or have significant income from investments, you generally (but not always) must make tax payments quarterly. If you don’t, you can incur penalties.
The first year you’re in business you typically don’t have to pay quarterly, and there are also a few other exceptions. However, if you don’t qualify for those exceptions, you will likely incur a penalty if you don’t pay quarterly.
Key takeaways
- Estimated payments – quarterly payments to cover your annual tax bill.
- Owed by – freelancers, business owners, corporations, and some investors.
- Amount – the penalty is based on the quarterly interest rate, the amount of the payment, and the due date.
- Making payments – you can mail in quarterly payments, pay online, or use the EFTPS.
- Equal payments – although many people make equal payments, you can use the annualized method to base the payments on your income.
- Exceptions – if you pay 100% of last year’s tax or 90% of this year’s tax, you may not incur a penalty.
Keep reading to learn more. If you are concerned about this penalty or other tax obligations, consider contacting the experienced tax attorneys at Damiens Law at (601) 476-1361 or (901) 499-4466.
What Is an Estimated Tax Payment?
An estimated quarterly tax payment is a payment that business owners and some investors make quarterly to cover their annual tax obligations. These payments are called estimated because the taxpayer doesn’t have to calculate them accurately. They can just base them on their previous years’ tax liability.
For self-employed individuals, estimated tax payments cover income taxes and self-employment taxes. Self-employment taxes include Social Security and Medicare.
In contrast, people who are employed by an employer don’t make quarterly tax payments because their employer withholds taxes from their checks every pay period. The reason that freelancers and business owners must pay quarterly is that the IRS uses a pay-as-you-go system, and the agency doesn’t want to wait until you file your annual return to get your taxes.
Who Must Pay Estimated Taxes?
Self-employed individuals who anticipate owning more than $1,000 for the tax year should pay estimated tax. This includes:
- Freelancers
- Sole proprietors
- Partners
- Shareholders
Additionally, corporations that anticipate owing $500 or more in tax for the year must generally make estimated tax payments.
However, estimated tax payments do not only apply to self-employed individuals. They also apply to individuals who may owe taxes due to receiving income from:
- Interest
- Dividends
- Capital gains
- Prizes
- Awards
Who Is Exempt From Estimated Quarterly Payments?
Individuals may not have to pay estimated tax for the current year if they meet all of the following requirements:
- Their total tax for the previous year was $0 or they did not have to file an income tax return.
- They were a United States citizen or resident alien for the entire year.
- Their prior tax year covered a 12-month period.
When Do I Have to Pay Estimated Tax Payments?
The due dates for your estimated payments are as follows:
- 1st Quarter – April 15
- 2nd Quarter – June 15
- 3rd Quarter – September 15
- 4th Quarter January 15 of the following year
If any of the due dates listed above fall on a weekend or legal holiday, the payment is due the next business day.
For example, quarterly payments for tax year 2024 are due on the following dates:
- Q1 2024: April 15, 2024
- Q2 2024: July 15, 2024
- Q3 2024: September 15, 2024
- Q4 2024: January 15, 2024
Quarterly payments for tax year 2025 are due on the following dates:
- Q1 2025: April 15, 2025
- Q2 2025: July 15, 2025
- Q3 2025: October 15, 2025
- Q4 2025: January 15, 2025
If taxpayers do not make the payment due by the due date, they may be charged a penalty, even if the IRS owes the taxpayer when they file their income tax return for the year.
Taxpayers can pay more often than quarterly if they so choose, as long as the total combined payments equal or exceed the amount of their tax liability for that period.
How to Calculate Estimated Tax Payments
Taxpayers can refer to their previous tax returns as a starting point to determine their potential tax liability and estimated tax payments. Simply take the tax due from the previous year, divide it by four, and make those payments every quarter.
If you don’t want to base your payments on last year’s taxes, you can use Form 1040-ES to help you calculate your estimated tax payments based on the current year’s earnings. Corporations can use Form 1120-W to calculate their estimated tax.
How to Make Estimated Tax Payments
You can pay through the mail. Send in your payment with the 1040-ES Payment voucher. You do not have to include the main part of this form. Just use that section to help you calculate the tax.
Alternatively, you can make estimated payments through your IRS online account. To set up an online account, you need a smartphone, photo ID, and email account. You can also make online payments through the EFTPS website. However, you may need to register first, which may require you to get a PIN in the mail.
There is also an IRS mobile app, and you can make payments through there as well.
Your professional tax preparer may also be willing to make payments for you. They may either mail in the payments, make them on the EFTPS.gov website, or use special tax preparer software.
What Is an Estimated Tax Payment Penalty?
The IRS can impose an estimated tax payment penalty when a taxpayer does not pay enough tax throughout the year. This tax may be due because the taxpayer did not have enough taxes taken out through withholdings, failed to make estimated tax payments, or failed to make other taxes that were due for the quarter.
How Much Are Estimated Tax Payments Penalties?
The estimated tax payment penalty is based on how much you owe and the IRS interest rate for that quarter. The interest rate adjusts quarterly, and it’s the Federal Short Term Rate plus three.
To give you an example, imagine that owed $80,000 in tax for tax year 2024, and you didn’t pay anything quarterly. In this case, the IRS assumes that you should have paid $20,000 each quarter. The interest rate for the entire year was 8%.
The penalty for the first quarter applies to the $20,000 payment as of its due date on April 15, 2024. If you’re filing on April 15, 2025, this payment is one year late so the penalty is going to be around $1,600.
The penalty for the second quarter applies to the next $20,000 payment starting on its due date of July 15, 2024. This payment is nine months late so it’s about $1200. This process applies to each of the quarterly payments.
Note that these calculations are simplified and reflect annual compounding. The IRS uses daily compounding so the actual penalties would be slightly higher.
Options for Resolving an Estimated Tax Payment Penalty
You may have several options for resolving your estimated tax payment penalty. An experienced tax lawyer from Damiens Law can consult with you, analyze your particular situation, and determine if any of the following options may help resolve your situation to your satisfaction:
Pay the Payment in Full
The fastest and simplest way to resolve the penalty is to pay any estimated taxes you owe, plus any penalty you have incurred.
Pay the Payment in Part
If you cannot afford to pay the entire amount of back-owed tax, you may be able to make a partial payment. Even though you may still owe an estimated tax payment penalty, the penalty will be lower because the amount of the fee depends, in part, on the amount of the taxes you owe.
Show You Do Not Owe the Tax
If you do not owe a lot of tax, you may be able to show that you do not owe the penalty. The penalty is not imposed if you owe less than $1,000 in tax, you paid 90% or more of the tax you owe for the current year, or 100% of the tax you owed for the previous year.
Ask for Safe Harbor
Even if you technically owe an estimated tax payment penalty, there may be times when the IRS will not enforce the penalty. For example, you may be able to avoid the penalty if you can show one of the following:
- Your business’s adjusted gross income is $150,000 or less, and the taxpayer paid 100% of the business’s tax liability for the previous year in equal payments
- The business’s adjusted gross income is greater than $150,000, and the taxpayer paid 110% of the business’s tax liability for the previous year in equal payments
In these situations, the taxpayer may be able to avoid the estimated tax payment penalty. However, they will have to pay any tax they owe for the year by April 15.
There are also special rules for farmers and fishers. If most of your income comes from those industries, you may be able to pay annually without worrying about a penalty.
Ask the IRS to Waive the Penalty
You may have other grounds to ask the IRS to waive your penalty, such as:
- The taxpayer or the taxpayer’s spouse became disabled during the tax year when estimated tax payments were supposed to be made or in the previous tax year
- The taxpayer retired after reaching the age of 62 during the tax year when estimated tax payments were supposed to be made or in the previous tax year
- The taxpayer did not make the estimated tax payments because of a casualty, disaster, or other unusual circumstance and it would not be equitable to impose the penalty
- The taxpayer had reasonable cause not to make the estimated tax payment, such as a medical emergency or death in the family, a house fire, a natural disaster, or another situation that made the taxpayer unable to make their estimated tax payment on time
- The taxpayer can claim the First Time Penalty Abatement Waiver
Taxpayers can request a penalty waiver by filling out Form 2210 and indicating their request. They must submit a statement explaining the situation and why they were unable to make the payment. They may also need to provide documentation that substantiates their reasoning, such as:
- Medical records
- Receipts of disability income
- Retirement account statements showing distributions
- Police reports
- Court records
- Insurance company reports
Do Estimated Tax Payments Have to Be Equal?
No, you do not have to make equal payments. If you want to pay based on your income, you should consider the annualized income installment method.
Many people make equal payments because it’s easy. When you file your tax return, the return software generates quarterly payment slips that show an equal amount due based on your last year’s tax return. You can simply write a check or pay online.
This concept is based on the idea that people tend to earn a similar amount from year to year and from quarter or quarter. However, if your earnings are more variable, you may want to consider the other approach.
Move to the Annualized Income Installment Method
Some business owners may make varying amounts of income each quarter. For example, some businesses are seasonal in nature. Therefore, many of their sales may come from only part of the year. The annualized income installment method allows taxpayers to split up their estimated tax payments to pay taxes in proportion to their earnings.
In these cases, a business owner can pay less in taxes when they earn less and more in taxes in quarters when they earn more. Using this method, a business owner could potentially avoid penalties from the IRS in the future.
Contact a Tax Lawyer to Learn More
If you are concerned you may owe an estimated tax payment penalty, consider contacting a knowledgeable tax lawyer at Damiens Law for assistance. We can analyze your situation and give you recommendations based on your unique circumstances. You can reach our Mississippi office at (601) 476-1361 or our Tennessee office at (901) 499-4466.
