June 15 is right around the corner. And that means estimated quarterly tax payments are due.
In the tax world, these payments are kind of a win-win.
The IRS is more likely to get the money you owe if you make smaller payments, which are more manageable and budget friendly for taxpayers than a large lump sum in April, explained Amy Peek, accountant owner of Pittsburgh-based Peekz ConsultiN.
But not everyone needs to make these payments. And that may be confusing for business owners or independent contractors worried about penalties or fines.
“Estimated tax payments are one of the biggest concerns I hear from new clients,” Peek says. “They want to know when they are due and how much they have to owe.”
Here’s a quick breakdown from Peek to help shed some light on these payments:
What are estimated quarterly tax payments?
These are payments due to the IRS based on your tax liability for the prior tax year. So, payments due this quarter should be one-fourth of what you owed in taxes for the 2016 tax year.
As the name implies, these are just estimates, however. If you end up owing more taxes by the end of the year, then you will have to pay the difference by the annual April 15 tax deadline. You also will be refunded, accordingly, if you end up paying more than what you actually owed.
When are they due?
They are due on April 18, 2017; June 15, 2017; Sep. 15, 2017 and Jan. 16, 2018.
What happens if I don’t pay them?
There are penalties for late payments or lack of payments, but they vary. Here’s more information on penalties from the IRS.
Who has to pay estimated quarterly tax payments?
Any U.S. citizen, business or independent contractor who had a tax liability for the prior tax year of more than $1,000. If you found out in April that you owed taxes for 2016, then you need to make estimated quarterly tax payments based throughout 2017.
Who doesn’t have to pay them?
If you didn’t owe any taxes in the prior tax year, then you don’t have to make estimated quarterly tax payments. You can make payments to the IRS if you want, but you are under no legal obligation.
What types of people typically don’t have to pay estimated tax payments?
Many of our new clients, including people starting new businesses or beginning to work for themselves as independent contractors, often fall into this category. Also, most people who are not self-employed do not have to make estimated quarterly tax payments because tax withholdings are already deducted from their paychecks through their employers.
If I don’t have to make estimated quarterly tax payments, does this mean I get out of paying taxes altogether?
No. This does not get you out of paying taxes by the annual April 15 deadline — you just don’t have to make quarterly payments leading up to the deadline for that year. Come April, if you end up owing more than $1,000 in taxes for the prior year, then you will need to start your estimated tax payment schedule for the following year.
If I don’t have to make estimated quarterly tax payments, then do I need to set aside any money from my earnings for taxes?
Yes. “This does not negate the fact that everyone should set aside 20 percent of their paycheck, either for taxes or financial independence. If you’re self-employed, you need to set aside 40 percent,” Peek says.
If my life changes, do I still have to make estimated quarterly tax payments?
Yes. If you go back to work for an employer in the middle of the year, close your business or go through another life shift, you still would be required to make the payments, Peek says.
In some cases, like self-employed people who have a part-time job or who have a spouse who works full-time, Peek recommends updating your tax withholdings (W-4 forms), so you don’t have to make separate tax payments.
What if my income exceeds the prior year?
If your income experiences a big boost and you suspect your tax liability for the current year will far exceed the prior year, Peek says, “Don’t overpay.” You are only obligated to pay a quarter of the prior year’s tax liability. The market can change. See how the year shakes out before committing your cash, Peek advises, and don’t give the government a free loan. If, at the end of the year, you do end up owing more taxes than the prior year, you can make an additional payment at that time without penalty. Meet with your accountant and learn more tax-saving tips to offset your tax liability
What happens if I miss a payment?
If you make an estimated quarterly tax payment after the due date, the IRS will apply it to your next due date. This typically is not a big deal throughout the year, Peek says, except for the January deadline. If you are late on the Jan. 16, 2008, payment, the IRS will apply it to your estimated tax payments of the following year. (For example, if you make a late payment on Jan. 20, 2018, the IRS will apply it to your first, or April, payment for your 2018 estimated taxes, not your tax liability for 2017.)
That’s when late payments become a bigger problem: By Jan. 16, 2018, you have to have paid 100 percent of your tax liability from the prior year or you are subject to fines and penalties.
How do I make an estimated quarterly tax payment?
There are a few ways to make the payments:
- You can mail your payments directly to the IRS. The IRS provides a worksheet and form to help you calculate your payments, along with instructions on how to file and the appropriate mailing address. Download the forms here. Some accountants will provide these forms with their tax preparations, while others charge fees. Peekz ConsultiN typically mails the forms out one month before the due date to our clients.
- You can set up an account through the IRS and make payments online or by phone on your own. It’s free, but a bit cumbersome, so give yourself plenty of time to establish an account before the due dates. It takes between seven and 15 days to set up an account and involves the IRS sending you a PIN number through the mail.
- Also, all FDIC-insured banks are required to accept estimated quarterly tax payments. Double-check that the bank has FDIC insurance.
How do I confirm the IRS has received the payments?
Unless you make payments online through the IRS, you need to make sure you make a copy and/or keep track of when your payment clears the bank. The IRS doesn’t have any way to confirm payments outside of its own online system, Peek says.
Still confused? Make an appointment with us and we’d be happy to answer your questions.
PHOTO CREDIT (payments): GotCredit/Flickr-CC
PHOTO CREDIT (Amy Peek): Alyson Raletz
Peekz ConsultiN LLC is a Pittsburgh-based accounting firm, located in the West Side, that caters to individuals, small businesses and nonprofit organizations. We aim to empower clients to help them take control of their finances and achieve their dreams.