Estimated Tax Payments 2023: Overview and When To Pay
For employed W-2 taxpayers, income tax is usually collected ongoingly through withheld payments on each paycheck. However, if you earn income as a freelancer, self-employed person, business, or other kinds of non-wage earnings, you may be required to pay the IRS through estimated quarterly taxes. In this guide, we’ll give an overview of these taxes, along with explaining when they need to be paid.
- Estimated tax payments are quarterly payments for your income tax on non-wage earnings.
- There are strict due dates for making estimated tax payments.
- Employees who don’t have enough withheld, businesses, self-employed people, and certain investors are subject to estimated taxes.
- There are 2 methods to calculate estimated tax and several methods to pay it.
Table of Contents
- What Are Estimated Tax Payments?
- Estimated Tax Payments Due Dates 2023
- Who Should Pay Estimated Quarterly Taxes?
- Are Estimated Tax Payments Avoidable?
- How To Calculate Quarterly Estimated Tax Payments
- How To Pay Estimated Tax Payments
- FreshBooks Makes Tax Preparation Simple
- Frequently Asked Questions
What Are Estimated Tax Payments?
Estimated tax payments refer to taxes paid to the IRS on any income that isn’t subject to tax withholding from your pay or pension payments throughout the year. Several kinds of non-wage earnings are subject to estimated taxes, including freelancer income, self-employed earnings, prizes, dividends, and realized capital gains. Companies also have to make estimated tax payments.
Occasionally, W-2 employees may also be required to make estimated taxes if the amount withheld on their paychecks doesn’t fully cover their income tax liability. The amount of tax that is withheld on your checks is mostly determined by the details on your W-4 form, which you would have provided to your employer when beginning a new job.
Estimated Tax Payments Due Dates 2023
Estimated quarterly tax payments are required to be paid at several points throughout the tax year, so it’s important to be aware of the deadlines for payment. Here are the key dates (and relevant income periods) to know this year:
|Income Period||Estimated Tax Payment Deadline*|
|January 1 – March 31||April 15|
|April 1 – May 31||June 15|
|June 1 – August 31||September 15|
|September 1 – December 31||January 15 of the following year|
*Note: If the estimated tax payment deadline falls on a weekend or a legal holiday, the due date shifts to the next day that isn’t a weekend or holiday. Your payment won’t be late if you submit by this date.
Who Should Pay Estimated Quarterly Taxes?
There are a number of income types that are subject to estimated quarterly taxes. Even if you’re a W-2 wage employee, some of your earnings may still be subject to estimated tax. Here are the most common scenarios that would require you to pay estimated quarterly tax:
- Employees that don’t have enough of their wage withheld: The IRS requires you to pay estimated quarterly taxes if you’ll owe more than $1,000 in federal income tax this year after accounting for withheld wages and refundable tax credits, and if your withheld wages and refundable credits cover less than 90% of this year’s tax liability or 100% of last year’s tax liability. If your adjusted gross income last tax year was more than $150,000 ($75,000 for married people filing separately), the threshold rises to 110%.
- Businesses: If corporations end up owing more than $500 in federal income taxes this year, they may be required to pay estimated quarterly taxes.
- Self-employed people: If you’re a freelancer, contractor, or just keep a side gig for extra income, you’ll likely need to pay estimated quarterly taxes if you expect to owe more than $1,000 in income tax this year. This is because taxes aren’t automatically withheld from your wages.
- Some landlords and investors: Even if you’re employed, you may still need to pay estimated quarterly taxes on income from rental properties or other investments.
Are Estimated Tax Payments Avoidable?
There are a few cases where you can avoid paying estimated quarterly taxes. If you’re a wage or salary employee, you can ask your employer to withhold more from each paycheck. This is done by filling out and submitting a new W-4 form to your workplace. Additionally, circumstances related to last year’s tax liability can make estimated taxes avoidable. According to the IRS, the conditions that must all be met to qualify for this are:
- No tax liability for the prior tax year (total tax was $0, or you weren’t required to file an income tax return), AND
- You were either a U.S. citizen or a resident alien for the entire year, AND
- Your last tax year covered an entire 12-month period
Quarterly tax payments don’t need to be stressful or time-consuming. Use a tax preparation tool like FreshBooks accounting to help track your earnings and estimated tax liability throughout the year.
How To Calculate Quarterly Estimated Tax Payments
There are 2 main ways to estimate your liability for federal estimated quarterly tax payments. Depending on how certain you are about your annual income and total tax liability, one of these methods will likely make more sense for your situation:
- Annualize: In this method, you estimate your projected tax liability for the year based on your taxable income for the whole year. This is a good option for freelancers and anyone else with more variable incomes, as it allows you to use more recent information on your earnings and deductions to make a more accurate estimation of your quarterly estimated tax liability.
- Estimation Using Prior-Year Taxes: This is a slightly simpler method that’s best suited to those with steadier, less variable income that’s subject to estimated taxes. In this method, you estimate the total income tax you’ll owe for the year based on what you paid last year. Then, you divide the total by 4 and send the quarterly estimate to the IRS each quarter.
Whichever method you opt to use, you’ll be required to fill out IRS Form 1040-ES, which is used to show your estimated income and projected tax bill. If you later realize you overpaid or underpaid, you can fill out another Form 1040-ES to correct your estimated tax for the following quarter.
How To Pay Estimated Tax Payments
There are a number of available methods when filing is complete and it’s time to pay your estimated taxes for the quarter. The IRS currently allows the following payment methods:
- Through your IRS online account
- Via the IRS app, IRS2Go
- Via IRS Direct Pay using your bank account
- Through debit or credit card payments (additional fees might apply)
- Using the Electronic Federal Tax Payment System (EFTPS)
- With cash at select IRS retail partners like Walgreens or 7-Eleven
- Through physical mail using a payment voucher (not recommended)
FreshBooks Makes Tax Preparation Simple
Estimated quarterly taxes are an important topic for many types of non-wage earners. Knowing the amounts of your estimated tax payments, when they’re due, and how to pay them will help you avoid late payment penalties and last-minute tax filing stress.
If you’re looking for support with this process, consider using an all-inclusive accounting software like FreshBooks. It helps to track and categorize income and deductions throughout the year, making it easier to calculate the net income that might be subject to estimated quarterly taxes. Try FreshBooks free today!
FAQs About Estimated Tax Payments
Still curious about the ins and outs of estimated taxes? Here are answers to some common questions on the topic.
Can I pay estimated taxes all at once instead of quarterly?
No, the IRS doesn’t allow you to pay any quarterly estimated taxes in advance. This goes for paying for the entire year, as well as paying for a quarter in advance. It’s important to make a note of the payment due dates and ensure you only file a quarter of your estimated tax each time in order to avoid penalties.
What happens if you overpay estimated taxes?
If you end up overpaying your estimated taxes, you won’t be subject to any penalties. Instead, the IRS will eventually issue you a refund, lessening your tax burden down the line. With that said, you won’t have access to that money for some time, so it’s often preferable to be as accurate as possible and avoid overpaying. You can also re-calculate the estimates in the following quarter and make a lower payment.
What is the penalty for underpayment of estimated tax?
If the IRS determines that you underpaid your estimated quarterly taxes, you’ll be subject to a penalty. The amount is calculated based on the amount that you underpaid, the period in which payment was due and underpaid, and the interest rate at the time of underpayment.
What happens if I miss a quarterly estimated tax payment?
If you miss the deadline for a quarterly tax payment, you should try to get payment in as quickly as possible. This is because, in addition to late payment penalties, interest is also charged on top of the amount, meaning you’ll pay more the longer you wait. Even if you can’t afford the whole payment right away, it’s best to pay what you can to avoid some of the interest.
What is the 110% rule for estimated taxes?
If your income increases and you estimate that your adjusted gross income will be $150,000 or more, you should calculate your estimated payments for that year based on 110% of the previous year’s tax bill. Following this 110% rule will help you avoid interest charges and penalties at tax time.
What are the safe harbor rules for underpayment penalties?
Safe harbor means that you are protected from a penalty by meeting certain conditions. In the case of underpayment penalties, the safe harbor rule allows you to avoid a penalty if you pay 90% of the tax you owe in the current year or if you pay 100% of last year’s tax liability. Additionally, you’ll need to owe less than $1,000 in taxes after factoring in withholdings and credits before you have to make any estimated payments.
About the author
Sandra Habiger is a Certified Public Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Learn more about her work at http://www.sixfiguresaccounting.com/ .