The next tax deadline is just around the corner. Yes, June 15, 2018 is a tax deadline!
I know you think Tax Day was a couple months ago so you might believe you can ignore tax deadlines for a while. That’s not the case if you owe estimated taxes. The 2nd quarter estimated tax payment is due on June 15th, 2018. That’s next Friday, so you still have time to determine if you need to make a payment and how much to pay.
The general rule for the US tax system is that you need to pay as you go. If you are an employee, then you do this through the withholding that your employer takes out of each of your paychecks. However, even some people that have withholding from their paychecks still need to make estimated tax payments. Also, if you are self-employed or participate in the gig-economy, then you most likely will need to make estimated tax payments throughout the year.
Why should I make Estimated Tax Payments?
I’d like to say that you should make estimated tax payments because that’s what good, upstanding citizens do in a civilized society. But let’s face it, that doesn’t motivate many people to hand over their hard-earned money to Uncle Sam. Therefore, Congress came up with a nifty way to motivate you to make the payment – they will penalize you if you don’t make the required payment. Unfortunately, they don’t give you a reward if you have an overpayment.
Basically, the IRS can assess a penalty on you if you don’t pay enough estimated taxes for the year, or if you don’t make the payments on time, or if you don’t pay the required amount for each quarter.
When is the payment due?
You only have to make these payments 4 times a year, on a quarterly basis. If you want, you can make your payments more frequently, like on a monthly basis. Making monthly payments might be a good option if you’re afraid you won’t have enough money saved up to send in a big payment at the end of each quarter.
So, let’s look at the payment dates for individuals:
(Note that if the standard date falls on a weekend or holiday, the due date is the next business day)
- The first estimated tax payment is due on April 15.
For 2018, this date was April 17, 2018 - The second estimated tax payment is due on June 15.
- The third estimated tax payment is due on September 15.
For 2018, this date will be on September 17, 2018. - The fourth estimated tax payment is due on January 15 of the following year.
For 2018, this date will be on January 15, 2019.
How much do I need to pay?
Now that you know the important dates, let’s discuss how much you should pay. When I talk with clients about this, there are usually two ways that people like to approach estimated tax payments. The first group of clients want to know the exact amount of their estimated tax payment and pay that amount. We’ll prepare an estimate for these clients using their actual year-to-date financial information each quarter to get as close as possible to their expected tax liability. These clients are the ones who don’t want any surprises when they file their tax return the following year. I do want to point out that this takes some additional time, which means it costs more to prepare these estimates. This is a factor to consider when using a tax pro like me to help you. Make sure that the cost to prepare the estimated tax payment amount is less than the expected underpayment penalty you would have to pay without doing the calculations. Sometimes, the savings just don’t justify the additional expense and your tax pro should be upfront about this and explain the pros and cons of each approach.
The second group of clients want to know the bare minimum that they have to pay to avoid an underpayment tax penalty. These clients use the safe harbor calculation discussed below. They still want to know a ball park figure of what their ultimate tax liability will be, but they prefer to pay over as little as possible throughout the year so they can keep their money longer. There’s nothing wrong with this approach, as long as you are aware that you might have a large payment due when you file your tax return (or extension) by April 15 the following year.
In my practice, the most common method is using the safe harbor calculation. This involves looking back at the tax liability for the prior year, then paying in enough to cover 100% of the prior year tax liability in the current year. You get to include the withholding from you paycheck when you make this calculation. Also, if your adjusted gross income was over $150,000 ($75,000 if your filing status for 2018 is married filing separately) then you need to pay 110% of the 2017 tax liability. The Form 1040-ES has a worksheet to help you do this calculation.
I’ll be honest and say that computing the amount due can get complicated quickly and it’s best to consult with your tax professional to help you get the right amount. This year (2018), it’s more important than most to get assistance because of the changes in tax law under the Tax Reform legislation that was passed in December 2017. The Tax Cuts and Jobs Act made a lot of changes that need to be incorporated into the estimated tax payment calculations. This means there are a lot of variables that can come into play and we can help you calculate the right amount for your situation so that you’re not surprised at the end of the year and you’re not penalized for underpayment.
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If you want to do it yourself when you calculate the payment that is due, my recommendation is to closely review the IRS Form 1040-ES. This is the form you use to send in your payment and the form on the IRS website includes detailed instructions and worksheets to help you out. You can find this form here: Form 1040-ES.
I would also recommend you take a look how the penalty is calculated. In some instances, you will be able to back into the amount you need to pay by figuring out the amount needed to avoid a penalty. The form used to calculate the penalty is IRS Form 2210 which is available for download from the IRS website. The IRS doesn’t include the instructions in the same pdf as the form, you so can find the instructions here: Instructions for Form 2210.
Other resources:
- Publication 505 (2018), Tax Withholding and Estimated Tax – This IRS publication will give you everything you need to know about tax withholding and estimated tax payments.
- Topic Number 306 – Penalty for Underpayment of Estimated Tax – This IRS Publication is a general explanation of the underpayment penalty.
- 6 ways to pay your estimated taxes – This blog post from my Twitter friend Kay Bell has some great information about paying your estimated taxes.
If you’d like help calculating your estimated tax payments, please contact me using the “Contact Me” page so we can schedule a meeting to go over ways I can help you save money on your taxes.