Estimated taxes are a crucial part of the tax system for self-employed individuals, freelancers, business owners, and those with significant investment income. Understanding who needs to pay estimated taxes, when these payments are due, and how to calculate them is essential for maintaining compliance with the IRS.
Let’s delve into the world of estimated taxes so you have clarity on these important aspects of tax responsibility.
Who Has to Pay Estimated Taxes
Estimated taxes are typically required from individuals and businesses that receive income not subject to withholding (think of non-W2 income). This includes:
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- Self-employed individuals
- Freelancers
- Sole proprietors
- Partners in partnerships
- S Corporation shareholders
- Landlords
- Investors with significant dividend or interest income
When Do I Have to Pay Estimated Taxes
Estimated tax payments are due four times a year, with the following deadlines:
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- April 15th
- June 15th
- September 15th
- January 15th of the following year
We send emailed reminders a few days prior to each deadline as a courtesy to our current clients.
How Much Should I Pay
This is where it can get complicated, especially if your income fluctuates from year to year.
Generally, if you pay 100% of your last year’s tax or 90% of the current year’s tax, there is no penalty. However, if your adjusted gross income is over $150,000, you need to pay 110% of the prior year’s tax, or 90% of the current year.
At a basic level, you estimate your total tax liability for the year and divide it into four equal payments. For our clients, we give them the future year estimated tax amounts with their current year tax return (you would get the 2024 vouchers with your 2023 1040).
At a more complicated level, as mentioned above, the amount you owe increases if you make over $150,000. And if your income is earned later in the year, you may be able to annualize your income when computing estimated tax liability to reduce penalties.
What If I Don’t Pay
Failing to make estimated tax payments or underpaying can result in penalties. Paying your estimated taxes is not just a legal obligation; it’s also a prudent financial practice that prevents unpleasant surprises when tax season rolls around.
Final Thoughts
Estimated taxes can be a complex but necessary part of managing your finances, especially if you have income not subject to withholding. By understanding who needs to pay, when payments are due, how to calculate them, and the potential consequences of non-payment, you can navigate these taxes with confidence.
Stay informed and proactive to ensure compliance with IRS regulations, and consider seeking professional guidance to make the process smoother. Remember, staying on top of your estimated taxes is not only a legal obligation but also a smart financial practice that prevents surprises come tax season.
At Aligned CPA, we’re here to support you in doing the work you love by doing what we love. Confidence in your compliance is achievable with our team on your side.
Joy Lutz, CPA, CTP
As the founder of Aligned CPA, Joy has built a firm that is your strategic financial partner. With a growth centric approach, we build meaningful relationships with our clients because we value their success as much as our own.
Positioning ourselves as the tax and financial strategists for your business, we help you make empowered, financial-based business decisions that lead to long term success.