Estimated Tax Payments: Stay Ahead and Avoid Surprises

For many taxpayers, income taxes are automatically withheld from each paycheck. However, if you receive income that is not subject to withholding, you may need to make estimated tax payments throughout the year.

Estimated taxes commonly apply to self-employed individuals, independent contractors, freelancers, business owners, and investors. You may also need to make payments if you receive significant income from rental properties, interest, dividends, capital gains, or other sources without sufficient tax withholding.

Generally, individuals may need to make federal estimated tax payments if they expect to owe $1,000 or more when filing their tax return after subtracting withholding and refundable credits. Self-employed taxpayers should remember that estimated payments may need to cover both income tax and self-employment tax.

Federal estimated taxes are generally paid in four installments during the year. Taxpayers can use Form 1040-ES to calculate estimated payments and pay electronically through IRS Direct Pay, an IRS Online Account, EFTPS, or other approved payment methods.

Paying too little tax during the year may result in an underpayment penalty, even if the remaining balance is paid when the tax return is filed. Generally, taxpayers can avoid the federal penalty by paying at least 90% of the current year’s tax liability or 100% of the prior year’s tax liability. Certain higher-income taxpayers may need to pay 110% of the prior
year’s tax.

Don’t wait until tax season to discover an unexpected tax bill. Pricewise Business Solutions can help estimate your tax liability, calculate quarterly payments, and develop a proactive tax strategy designed to reduce surprises, avoid unnecessary penalties, and improve cash-flow planning.