Entrepreneurs, sole-proprietors, shareholders of S corporations, partners in partnerships, and members of LLCs, as well as certain employees with wages may need to make quarterly estimated tax payments to avoid paying interest and penalties.
If it stands that you will owe more than $1,000 when you file your individual income tax return, then to avoid penalties and interest, you should pre-pay the federal and state governments with estimated tax payments.
Payable on the 15th of the fourth, sixth and ninth month of the current fiscal year, and the 15th of the first month following the the fiscal year (see list below), the payments must be made in four equal installments.
Payments are generally due on:
- April 15
- June 15
- September 15
- January 15 (of next year)
Know the triggers
- You expect to owe more than $1,000 in tax after credits and other withholding.
- Pay in less than 90% of your current year’s tax, (which most of don’t know),
- Pay in less than 100% of your prior year’s tax, or
- Pay in less than 110% of your prior year’s tax if you make more than $150,000 ($75,000 of married filing separate).
Making the payments
The easiest way to pay estimated tax is electronically through the Electronic Federal Tax Payment System (EFTPS). You can also pay estimated tax free of charge by check or money order using the Estimated Tax Payment Voucher or by credit or debit card which comes with a processing fee.
Unless you live in a state that doesn’t have income tax, you will also have a similar requirement, with similar thresholds for each state you have a filing requirement in. Each state has their own system, but most are similar in nature. In California, you can visit the Franchise Tax Board’s website, and make a payment using one of their payment options, as well as mailing in their estimated tax voucher by the due date.
If you have underpaid estimated taxes in earlier quarters, you generally can not avoid penalties by making larger estimated payments in later quarters. But, if you also have withholding, you may be able to avoid having the estimated tax shortfall withheld from your paycheck. Employees can submit a revised Form W-4, and have an additional amount withheld from each paycheck or reduce the number of allowances. And owners of S corporations that have “reasonable wage” requirements can have the additional amounts withheld from their paychecks.