Estimated Taxes and the Paycheck Checkup

For US taxpayers, the 3rd quarterly estimated tax payment is due on Monday, September 17, 2018. This means you should have 75% of the taxes you expect to pay for 2018 paid in by that date. You can use this estimated tax payment in conjunction with double checking your withholding using the Paycheck Checkup from the IRS.

Picture of a person calculating their income tax liability.
Calculate your expected taxes and required withholding to make your third quarter estimated tax payment. | Photo by Green Chameleon on Unsplash

Why does it matter this year?

A lot has changed for tax calculations in 2018 and now is a perfect time to check your progress since there is still time to make adjustments. The Tax Reform that Congress enacted late in 2017, also known as the Tax Cuts and Jobs Act, could have serious implications on the amount that you need to pay in taxes. For sample of some items that changed for 2018, consider the following:

  • Tax rates changed significantly for all people
  • State income, property and/or sales tax deductions are limited to $10,000
  • Standard deduction amounts are higher
  • There are no more personal exemptions
  • Child tax credits changed so more families should qualify
  • Many common itemized deductions went away, such as tax prep fees, union dues, unreimbursed employee expenses, gambling losses, expenses related to hobby losses, home office deductions for employees and investment expenses

The above list isn’t all encompassing but it should be enough to alert you that there are substantial changes under the TCJA and you can’t rely on the fact that you’ve always been OK in the past.

First take a look at your withholding

The US has a pay-as-you-go system of taxes so you’re supposed to pay in taxes throughout the year. If you’re an employee, your employer will withhold a calculated amount from each paycheck to cover your taxes and send this amount to the IRS. The IRS holds it for you in your account and then you claim this amount on your tax return that you file the next year.

Your employer figures out the amount to withhold based on a limited amount of information that you provided to them. You give them this information on a Form W-4. This form has been updated to reflect changes in the tax reform law so you should update this form to make sure it’s still accurate for you.

Next review your Estimated Tax Payments

Estimated tax payments are the way to pay your taxes if you don’t have any withholding or if your withholding won’t cover your tax liability. Like I said above, the US tax system is a pay-as-you-go system and you should be paying into the tax system on regular intervals. The traditional people who have paid in estimated taxes are business owners and freelance workers.

Now that more people are taking on part-time gigs and sharing economy jobs, more people need to consider making these estimated tax payments. The earning you make doing these side hustle jobs are taxable but they typically don’t have any withholding. That means it’s up to you to pay your taxes on this income through estimated tax payments.

TIP: Don’t forget to subtract your related business expenses when you figure out the amount of taxes that you need to pay.

How does the estimated tax payment interact with withholding

If you can’t bring yourself to make estimated tax payments on your gig work, you can consider increasing your withholding to cover your total shortfall. You do this by decreasing the number of allowances on your Form W-4 and, if you still need more withheld, put in the amount you need withheld on line 6 of the Form W-4. While you’re updating your W-4, consider doing the Paycheck Checkup.

When is the estimated tax 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)

  1. The first estimated tax payment is due on April 15.
    For 2018, this date was April 17, 2018
  2. The second estimated tax payment is due on June 15.
  3. The third estimated tax payment is due on September 15.
    For 2018, this date will be on September 17, 2018.
  4. The fourth estimated tax payment is due on January 15 of the following year.
    For 2018, this date will be on January 15, 2019.

You can read more about estimated tax payments and why they are important in 2018 from my earlier blog post about the second quarter estimated tax payment.

Final Thoughts

You have until September 17, 2018 to figure out if you need to make an estimated tax payment. Even if you don’t think you need to make a payment, you are highly encouraged to check your withholding using the “Paycheck Checkup” because it is estimated that more Americans will have to pay with their tax returns than in previous years. This means, more Americans than usual will not be receiving the refund they are expecting.

As always, it is best overall to enlist the help of your tax professional if you are in the situation that you need to make estimated tax payments. Feel free to contact me if you need assistance and don’t have a tax professional to help you.