Estimated Taxes

Estimated taxes are payments made to the Internal Revenue Service (IRS) throughout the year to cover income tax, self-employment tax, and other taxes. These payments are necessary if the amount of income tax withheld from your salary or pension is not enough, or if you receive income from sources such as interest, dividends, alimony, self-employment income, capital gains, prizes, and awards. If you are in business for yourself, you generally need to make estimated tax payments.

Who Must Pay Estimated Tax

Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.

You may have to pay estimated tax for the current year if your tax liability was more than zero in the prior year. To determine if you need to pay estimated tax, refer to the worksheet in Form 1040-ES, Estimated Tax for Individuals.

Who Does Not Have to Pay Estimated Tax

If you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings. To do this, file a new Form W-4 with your employer. There is a special line on Form W-4 for you to enter the additional amount you want your employer to withhold.

If you receive a paycheck, you can use the Tax Withholding Estimator to ensure that the right amount of tax is withheld.

You don’t have to pay estimated tax for the current year if you meet all three of the following conditions:

1. You had no tax liability for the prior year.
2. You were a U.S. citizen or resident alien for the whole year.
3. Your prior tax year covered a 12-month period.

You had no tax liability for the prior year if your total tax was zero or you didn’t have to file an income tax return. For additional information on how to figure your estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax.

How to Figure Estimated Tax

Individuals, including sole proprietors, partners, and S corporation shareholders, generally use Form 1040-ES to figure estimated tax. Nonresident aliens use Form 1040-ES(NR) to figure estimated tax.

To figure your estimated tax, you must calculate your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. When figuring your estimated tax for the current year, it may be helpful to use your income, deductions, and credits from the prior year as a starting point. Use your prior year's federal tax return as a guide. You can use the worksheet in Form 1040-ES to figure your estimated tax. It is important to estimate your income as accurately as possible to avoid penalties.

You must make adjustments both for changes in your own situation and for recent changes in the tax law.

When to Pay Estimated Taxes

For estimated tax purposes, the year is divided into four payment periods, each with a specific payment due date. If you don’t pay enough tax by the due date of each payment period, you may be charged a penalty, even if you are due a refund when you file your income tax return.

If a payment is mailed, the date of the U.S. postmark is considered the date of payment. If the due date for an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be considered on time if made on the next day that isn’t a Saturday, Sunday, or holiday.

How to Pay Estimated Taxes

You can send estimated tax payments with Form 1040-ES by mail, or you can pay online, by phone, or from your mobile device using the IRS2Go app. You can also make your estimated tax payments through your online account, where you can see your payment history and other tax records. Visit IRS.gov/payments to view all the options. For additional information, refer to Publication 505, Tax Withholding and Estimated Tax.

Using the Electronic Federal Tax Payment System (EFTPS) is the easiest way for individuals and businesses to pay federal taxes. You can make all of your federal tax payments, including federal tax deposits, installment agreement, and estimated tax payments, using EFTPS. If it’s easier for you to pay your estimated taxes weekly, bi-weekly, monthly, etc., you can do so as long as you’ve paid enough by the end of the quarter. EFTPS allows you to access a history of your payments, so you know how much and when you made your estimated tax payments.

Corporations must deposit their payments using the Electronic Federal Tax Payment System. For additional information, refer to Publication 542, Corporations.

Penalty for Underpayment of Estimated Tax

If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. However, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers, fishermen, and certain higher income taxpayers. Please refer to Publication 505, Tax Withholding and Estimated Tax, for additional information.

If your income is received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments. Use Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts (or Form 2220, Underpayment of Estimated Tax by Corporations), to see if you owe a penalty for underpaying your estimated tax. Please refer to the Form 1040 and 1040-SR Instructions or Form 1120 Instructions for where to report the estimated tax penalty on your return.

The penalty may also be waived if:

• The underpayment was due to a casualty, disaster, or other unusual circumstance, and it would be inequitable to impose the penalty.
• You retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and your underpayment was due to reasonable cause and not willful neglect. For information on how to request a waiver, see Form 2210 Instructions.