If you have income that is not subject to withholding like self-employment, gig work, investment returns, or vested RSUs, estimated tax payments are crucial to avoid penalties. The IRS requires paying taxes on these income sources quarterly rather than waiting until tax day.
Understanding estimated taxes enables you to properly budget for your tax liability throughout the year. In this comprehensive guide, you’ll learn:
Armed with this information, you can confidently manage your estimated taxes like a pro!
Who Has to Pay Estimated Taxes?
You typically need to pay estimated taxes if you expect to owe over $1,000 when you file your tax return. Common situations requiring estimated tax payments include:
Self-employed individuals or business owners - Income from your solo or pass-through business is not subject to withholding so you must pay estimates. Nearly all self-employed taxpayers make quarterly estimated payments.
Employees with substantial non-wage income - If you have sufficient income from interest, dividends, capital gains, rentals, royalties or other sources that will increase your tax bill by over $1,000, you should pay estimated taxes.
Retirees - Once retired, taxes are no longer withheld from Social Security benefits or investment disbursements, so estimates help avoid a big balance due.
RSU recipients - Unlike salaries which have taxes withheld, RSUs that vest typically require estimated payments on the value.
In these cases, paying as you earn income helps avoid a large, stressful tax bill on April 15th.
How Much Are Quarterly Estimated Tax Payments?
To calculate how much you should pay quarterly, you must first project your taxable income and resulting tax bill for the year. Then make equal payments of 25% of this total tax estimate each quarter:
Estimate your full-year taxable income
Calculate total tax bill on this income
Pay 25% of your estimated tax bill each quarter
For example, if you project making $100,000 in self-employment income this year, and estimate your total tax bill will be $25,000, you would pay $6,250 each quarter in estimated taxes ($25,000 x 0.25 = $6,250). This ensures you pay in 25% of your expected liability each quarter rather than waiting to pay it all at once. The deadlines are April 15, June 15, September 15, and January 15 of the following year.
Estimated Taxes on Self-Employment Income
For self-employed individuals or pass-through business owners, accurately estimating income and resulting taxes takes some planning. Here are some tips:
Use last year's earnings as a baseline but factor in expected growth or declines
Consider economic conditions impacting your customers and revenue
Build your quarterly projections from a detailed business budget
Have your prior year CPA-prepared tax return handy to understand total liability
Treat each quarter payment as a business expense by setting funds aside regularly
Work with a tax professional to project taxes in complex situations
Thoroughly estimating self-employment taxes ensures you avoid penalties while appropriately budgeting for your liability. An accurate projection requires looking at all factors impacting your net income.
Handling Estimated Taxes on RSU Income
For employee restricted stock unit (RSU) awards, properly managing estimated taxes gets tricky because unlike salary you do not have taxes automatically withheld when they vest.
Follow these tips for RSUs:
Understand your vesting schedule to know when income will hit
Project your income including RSU vesting value to estimate total tax liability
Increase payroll withholding on your salary if allowed or make estimated payments
Make quarterly payments after vesting events to cover the incremental taxes
Confer with your company stock plan administrator for guidance
Discuss estimated payment implications with a tax professional
With some planning, RSU recipients can stay ahead of estimated taxes to avoid penalties.
Estimated Tax Payment Deadlines
Estimated tax payments for both self-employment income and RSU vesting follow the same quarterly deadlines:
1st Quarter (January 1 to March 31) - Due April 15
2nd Quarter (April 1 to May 31) - Due June 15
3rd Quarter (July 1 to August 31) - Due September 15
4th Quarter (September 1 to December 31) - Due January 15 of following year
Mark your calendar with these due dates to ensure payments are made on time.
Strategies to Avoid Underpayment Penalties
Missing or underpaying estimated taxes will result in underpayment penalties when you file your return. But several strategies can help avoid such penalties:
Pay 100% or 110% of prior year's tax liability rather than quarterly estimating - This safe harbor method avoids penalties for W-2 wage earners.
Make timely payments each quarter and year-end top-up payment - Paying on time but underestimating still triggers penalties unless you make a top-up payment with your return.
Withhold more taxes from your W-2 wages - Increasing payroll withholding can cover tax liability from other income sources and reduce estimated payment needs.
Use annualized installment method if income varies by quarter - This method often lowers required payments by annualizing each quarter's income separately.
Work closely with a tax professional to minimize penalties. Accurately projecting taxes due takes skill and experience.
Frequently Asked Questions:
What types of income require estimated tax payments?
Estimated payments are required on most non-wage income like self-employment, side jobs, interest, dividends, capital gains, rents, commissions, lawsuit settlements and other irregular income sources.
When are quarterly estimated payments due?
Estimated payments for both federal and most state taxes are due April 15, June 15, September 15, and January 15. Pay attention to weekends and holidays.
What if I underpay my quarterly estimated taxes?
You may face underpayment penalties when you file your return. Interest charges apply until any outstanding balance is paid. Make an additional “top up” payment as soon as possible.
How do I calculate my required estimated payment amounts?
Total your projected tax liability for the year, then pay in 25% installments each quarter. Use 90%-110% of prior year tax as a safe harbor if income is unchanged. Consider using the annualized installment method if income fluctuates quarterly.
Can I just increase my W-2 withholding instead of estimated taxes?
Yes, increasing payroll withholding can reduce the need to make separate estimated payments, as long as your W-2 withholding covers at least 100% of your prior year’s tax liability. Use the IRS Tax Withholding Estimator tool for help.
Get Professional Help with Estimated Tax Payments
United Tax's experienced team provides expert assistance to individuals and businesses dealing with quarterly estimated taxes. We offer precise calculations, safe harbor evaluations, and penalty avoidance strategies. Stay compliant with up-to-date IRS regulations. Contact us for peace of mind, accurate payments, annual tax returns, and penalty support. Simplify your estimated tax responsibilities with our tailored guidance.
