It's that time of year again. Tax season is quickly approaching and for many people, it can be a stressful time. One question on the minds of many taxpayers is "When are estimated taxes due?" Well, we have you covered! This blog post will answer that question as well as provide other helpful information about tax season in general.
In this article, we'll go over the deadline, rules for making quarterly taxes, and exceptions for making quarterly estimated tax payments.
Due Dates To Pay Estimated Taxes
Many folks who work at a company, have taxes withheld from their paychecks in order to pay to the government. In most cases, the money taken from the employee's annual income is refunded to them. If the employer does not withhold enough, then the employee will have to pay additional taxes.
Independent contractors on the other hand are paid in full. They are self-employed and do not have taxable income withheld from their paychecks throughout the year. Individuals have to pay estimated taxes if they have a substantial amount of taxable income that is not subject to withholding.
The U.S operates on a "pay-as-you-go" system. Money earned that is without withholding from an employer for Social Security and Medicare taxes (or self=employment tax), then you have to pay the IRS every quarter. It forces contractors or self-employed folks to pay estimated taxes four times a year instead of waiting until annual tax returns are due.
To avoid a penalty, the IRS due dates to make estimated tax payments are on:
- April 15 (First quarter: January 1 - March 31)
- June 15 (Second quarter: April 1 - May 31)
- September 15 (Third quarter: June 1 - August 31)
- January 15 of the following year (Fourth quarter: September 1 - December 31)
If a due date falls on a weekend or legal holiday, then the IRS requires payments to be issued on the next business day.
In 2021, the due date for the first estimated tax payment was not moved back from April 15 although the filing deadline was moved to May 17. This means you are still required to make an estimated tax payment by April 15.
If you're self-employed or have other fourth-quarter income that requires you to pay quarterly estimated taxes, get them postmarked before each deadline due date. You could also use a tax software for freelancers like Bonsai Tax to have you send reminders.
When You Do NOT Have To Pay Estimated Taxes
The IRS has three conditions for if you are required to pay estimated taxes. You do not have to file quarterly taxes if you meet these three conditions:
- You had zero tax liability from the prior year
- You were a U.S resident or citizen for the whole year
- If your prior tax year covered a 12-month period
Fishermen and farmers have exceptions if they have to pay estimated tax.
The IRS accounts for when taxpayers has life events that may affect their taxes. Life events like marriage, child birth or serious injury could impact their taxes.
The worksheet of Form 1040-ES is typically used by individuals, sole proprietors, partners, and S corporation stockholders. They'll need to know what their adjusted gross income is likely to be.
The $1,000 Rule
The penalty does not affect folks who owe less than $1,000 in taxes. Those who are expected to owe less than $1000 in tax liability do not need to worry about estimated taxes.
This is after taking into account any withholding and refundable tax credits such as earned income credits and premium tax credits.
Calculating An Estimated Tax Payment
You can easily calculate your quarterly estimated tax payments by using many free online tools. Each estimated tax payment should be the same every quarter. It is calculated by adding up your total tax liability for the year (including income tax, self-employment tax, and any other taxes—and dividing that number by four.
You can use Form 1040-ES to calculate and pay your estimated taxes. See if the 2021 estimated tax payments are influenced here.
How To Make An Estimated Tax Payment
There are many ways to make estimated tax payments to the IRS.
You may send estimated tax payments with Form 1040-ES by mail, or you can make your estimated tax payments online with IRS Electronic Federal Tax Payment System (EFTPS) or by phone using the IRS2Go app. Visit IRS.gov/payments to view all the options.
Preparing To Make Estimated Tax Payments
While you can prepare and calculate self-employment taxes in order to pay by April 15 the following year, you will likely be subject to penalties and interest for not paying Quarterly Estimated Taxes (QET).
Many freelancers don't understand this and end up paying more self-employment taxes each year because of penalty fees they've accrued. To avoid this, it is always best to pay the estimated taxes every quarter to the IRS and state (if applicable).
When you file your tax return, if you paid too much in quarterly taxes, you can get a refund. If you paid too little, you will owe taxes and receive a penalty.
Rules For Filing Estimated Tax Payments
The IRS has clear rules for filing estimated taxes and many freelancers don't understand this at all, which leads to an increase in self-employment taxes every year because they're accumulating penalties due to not paying quarterly estimated taxes on time.
You can either pay 100% of the tax owed with your return or use a payment method other than withholding.
You need to pay quarterly estimated taxes if you fall into one of these categories:
- You expect to owe at least $1,000 in tax for the year, after subtracting your withholding and refundable credits.
- You expect your withholding and refundable credits to be less than the smaller of:
- a) You must pay at least 90% of the tax to be shown on your tax return for the current year, or
- b) 100% of the tax shown on your 2020 tax return. Your 2020 tax return must cover all 12 months (110% if your 2020 adjusted gross income was more than $150,000).
If you use your prior year tax bill as a gauge for your current year's tax liability, as long as you pay 100% of your tax bill from the previous tax year, you will not receive a penalty.
If your income changes dramatically i.e. you lost a client and your income plummeted, you can adjust the remaining estimated tax payments. By doing so, you can avoid or minimize overpaying estimated tax payments. Many self-employed individuals will overpay their 2021 estimated tax due to the coronavirus pandemic.
Failing to pay a quarterly estimated tax payment properly will mean fees on top of the taxes you owe. If you don't pay enough of your tax liability or less than you should throughout the year, you can receive an underpayment tax penalty.
Alternatively, instead of making estimated payments throughout the year, you can estimate your Federal tax liability and pay in full on the designated Tax Day. While you can pay all your taxes by April 15, it's probably not the best for your bank account.
The Penalty For Not Filing With The IRS Every Quarter
What happens if you pay estimated taxes late? Well, if you miss the deadlines to file your quarterly taxes, the IRS estimated tax penalty rate is typically .5% of the tax owed on the due date. With each month that passes after the deadline and you don't file, the IRS will add an additional penalty. The penalty caps out at 25%. So, pay your estimated taxes right away if you miss the deadline!
Income Later In The Year?
If you didn't earn income until later on in the year, you don't have to pay estimated tax until you have the income to owe taxes on. For example, if you start earning income after August 2021, then you are not required to make estimated payments until the September 15, 2021 quarter. If this were the case, then you could potentially file your estimated taxes in full or divide the payments in 2 (with the second payment due in January 15).
Farmers And Fishermen
For farmers and fishermen who earned two-thirds of their income by farming or fishing, they can make just one estimated tax payment for the tax year or by January 18, 2022. It should also be noted, if you file your tax return prior to March 1, 2022, and pay all of your tax you are responsible for at that time, you do not need to make estimated tax payments.
There You Have It...
We hope this guide has helped you understand quarterly taxes better as well as show you the due dates or deadlines for filing. Remember, you can always use an annualized installment method at tax time to avoid a penalty for not paying or filing estimated taxes throughout the year. So, if you file your 2021 tax return by January 31, 2022 and pay off the entire balance, you don't have to make the payment owed on January 18, 2022.
Be sure to check the IRS's site for more updates. Paying estimated taxes by the deadlines is important for many reasons, including avoiding penalties. However, the most important reason is to avoid any delinquent payments from showing up on your credit report.
