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Paying the IRS – Planning to Pay Individual Estimated Tax

March 18, 2022

In the U.S.A., there is no system of year-end adjustment of income tax. Each taxpayer calculates the amount of tax due and submits a tax return to the IRS by April 15 of the following year to settle any excess or deficiency in estimated tax payments or withholding taxes. If you pay more tax, the overpayment will be refunded. On the other hand, if you pay less, you will have to pay additional tax, and if you withhold or estimated tax payment does not meet IRS standards, you may be subject to penalties.

Cases in which estimated tax payments are required

Self-employed persons, retired, and non-working individuals most often must pay estimated tax to avoid the penalties. But even employees may have a greater need to pay estimated taxes if they work multiple jobs, their spouse also has income, they have investment income, or if they are salaried and if the amount of tax withheld from wages is not sufficient to cover the tax on other income. The potential tax owed on investment income also may increase the need for paying estimated tax, even among wage earners.

Deadline for estimated tax payments

The trick with estimated taxes is to pay enough estimated tax to avoid penalties but not to overpay. That is because while the IRS will refund the overpayment when you file your return, it will not pay you interest on it. Individual estimated tax payments are made in four installments. For the typical individual who uses a calendar tax year, payments are due on April 15th, June 15th, and September 15th of the tax year, and January 15th of the following year (or the following business day when it falls on a weekend or other holiday).

Schedule estimated tax payment rules in general

You must pay estimated taxes if

  • you expect to owe at least $1,000 in tax after subtracting tax withholding

  • you expect that you are withholding and credits to be less than the smaller of 90 percent of your current year taxes or 100 percent of the tax on your prior year return

Schedule estimated tax payment rules for high-income taxpayers

There are special rules for higher income individuals.

  • If your adjusted gross income for your prior year exceeded $150,000, you must pay either 110 percent of the prior year tax or 90 percent of the current year tax to avoid the estimated tax penalties.

  • For married filing separately, the higher payments apply at $75,000.

Need to consider other taxes

Estimated tax is not limited to income tax. In figuring your installments, you must also consider other taxes such as the alternative minimum tax, penalties for early withdrawals from an IRA or other retirement plan, and self-employment tax, which is the equivalent of social security taxes for the self-employed.

Suppose you owe only a small amount of tax. There are no penalties if the tax underpayment for the year is less than $1,000. However, once an underpayment exceeds $1,000, the penalty applies to the full amount of the underpayment.

Avoid penalties

An employee realizes before the end of the year that his or her income is higher than expected, the employee may be able to avoid the penalties by getting the employer to increase withholding in an amount needed to cover the shortfall. The IRS will treat the withheld tax as being paid proportionately over the course of the year, even though a greater amount was withheld at year-end. The proportionate treatment could prevent penalties on installments paid earlier in the year.

The annualized income installment method of paying estimated tax

If income is uneven over the course of the year, you may use the annualized income installment method of paying estimated tax. Under this method, your adjusted gross income, self-employment income and alternative minimum taxable income at the end of each quarterly tax payment period are projected forward for the entire year. Estimated tax is paid based on these annualized amounts if the payment is lower than the regular estimated payment. Any decrease in the amount of an estimated tax payment caused by using the annualized installment method must be added back to the next regular estimated tax payment.

The method of payment for Estimated tax

Estimated taxes are paid by enclosing a check on Form 1042-ES voucher and mailing them to the IRS or by ACH and credit card.

Finally, figuring out estimated taxes can be complex. You will also need to make estimated tax payments not only to the IRS, but also to each state. For more information, please refer to the IRS publication on estimated tax payments below, or please contact us to discuss your individual case.


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