It’s early June and I bet you’re in one of two camps. Either you filed your Form 1040 by April 15, 2019 and don’t want to think about taxes until next January. Or, you extended your Form 1040 by April 15, 2019, and you don’t want to think about taxes until the extended deadline of October 15, 2019. Regardless of which camp you’re in, there is an upcoming tax deadline you might want to consider. It’s the 2nd quarter estimated tax payment, which is due on June 17, 2019.
What are estimated tax payments?
Estimated tax payments are payments you make towards your current year tax liability that cover any amounts due which aren’t collected through withholding. If you are an employee and your employer withholds taxes on your wages, then in a perfect world they should be withholding enough to cover your tax liability. However, the tax reform law commonly known as the Tax Cuts and Jobs Act from December 2017 has created some complications that might make it necessary for you to either adjust your withholding or make estimated tax payments.
If all your income is from wages as an employee, rather than making estimated tax payments, it’s probably easier for you to update your withholding. You can do this by doing a Paycheck Checkup and using the IRS Withholding Calculator on their website. This calculator should help make sure the withholding on your wages will cover your tax liability for the year. However, keep in mind, the more sources of income you have or the more type of deductions you have, the less like using the IRS Withholding Calculator will be enough to collect all your taxes through withholding.
Taxpayers with, shall we say, complicated situations will usually benefit from making estimated tax payments in addition to any withholding on their wages. So, if you have income that doesn’t have any withholding, this would be how you pay taxes on this income. Sometimes this extra income comes from investment income like interest, dividends and capital gains, and other times it comes from a small business that you participate in.
Just so we’re on the same page, I consider small business income to be any income from your sole proprietorship, partnership, s corporation, or your gig job. Yes, some people don’t think about the gig job as a “small business” but it actually is and the income is subject to tax. To make matters worse, you’re responsible to pay the tax on this income periodically through the year on at least a quarterly basis.
When are quarterly estimated tax payments due?
Like the name implies, these payments are due on a somewhat quarterly basis. You can make payment more frequently if you have a hard time saving the money and not spending it during the quarter. For the quarterly payments, here is the schedule:
- 1st Quarter – these payments are due on April 15.
- 2nd Quarter – these payments are due on June 15.
(Since June 15, 2019 is a Saturday, the payment is due on Monday, June 17, 2019) - 3rd Quarter – these payments are due on September 15.
(Since September 15, 2019 is a Sunday, the payment is due on Monday, September 16, 2019) - 4th Quarter – these payments are due on January 15 of the following year.
As you can see from the schedule above, if the due date for these payments falls on a weekend or other recognized holiday, the payment is due on the next business day.
How much should I pay?
Determining how much to pay with your estimated tax payments can be a little tricky. The first thing to remember is you have two options in calculating the amount to pay:
The first option is to make sure your withholding and estimated tax payments is at least 100% of your 2018 tax liability. This is referred to as the safe harbor. If you’re a high income taxpayer, then your target is 110% of your 2018 tax liability. High income taxpayers for 2019 are taxpayers whose 2018 Adjusted Gross Income (AGI) for 2018 was more than $150,000 ($75,000 if your filing status for 2019 is married filing separately). Using this method doesn’t mean you’ll have enough withheld by the end of the year so that you don’t owe with your return, however, it does mean you’ll have enough withheld that you won’t be subject to penalties for underpayment of estimated taxes.
The second option is to make sure your withholding and estimated tax payments will cover at least 90% of your 2019 tax liability. This is where it gets tricky because how do you know in June 2019 what your full 2019 tax liability will be? One answer to this question is to contact a tax professional like me who has many tools to help us do this calculation. However if you don’t have a tax professional you can use the IRS Form 1040ES. This form has a worksheet that will help you calculate the amount for each quarter.
There are a number of resources on the IRS website that can help you out if you’re doing it on your own. The first place to start is their “Estimated Taxes” webpage. This page might have all the information you need, but if not, there are links to other useful items, like Publication 505, Tax Withholding and Estimated Taxes. This IRS publication goes into all the details you need.
How do I make my payment?
The IRS will take your payments in a number of ways. The traditional method of mailing a check to the IRS is still accepted but they would prefer you to use a more modern method of payment. In fact, the IRS includes payment by check as the last method in their long list of payment methods that you can use.
In recent years the IRS has substantially increased the amount of online payment options and this is probably the most popular form of payment for individuals. You can see all the options available at IRS.gov/Payments.
If you don’t want to use one of their online payment options, you can sign up for their Electronic Federal Tax Payment System (EFTPS). This system is best for large payments but it is open to anyone. Once you setup this program, it’s really simple and easy to use.
What if I don’t make quarterly estimated tax payments?
You’re required to pay taxes on your income as you earn it. If you don’t pay enough tax through withholding or estimated tax payments, you might have a penalty for underpayment of estimated taxes. This penalty is based on the number of days the payment was late. One way to think about it is interest on the unpaid balance. You can see how this is calculated on Form 2210.
Is there anything else I should know?
Some people find that calculating the estimate tax payment amount to be too complicated to bother with each quarter. I completely understand this and suggest you work with a tax professional to make this easier. If that’s not an option, what can you do? Well, you can take a set percentage of your income and pay that as your estimated tax payment each quarter. Doing this doesn’t guarantee you won’t have a penalty for failure to make estimated tax payments and it doesn’t guarantee you’ll have enough paid in at the end of the year to cover all your taxes, however it does help minimize any penalty or amount due with your return. Some people take a fixed amount like 25% or 30% and put it away each time they receive the income and send it to the IRS at least on the quarterly basis. You can also figure out your tax bracket for the year and use your current year tax rate.
If your income is pretty consistent from year to year, then using the safe harbor method I mentioned earlier is probably your easiest way to avoid the penalties. However, if you have a new source of income, then you’re probably going to need more paid in than just using the safe harbor method and that’s where calculating the payment benefits you. The safe harbor might keep you from having a penalty but it won’t guarantee that nothing is due with your return when you actually file it.
I hope you find this post helpful in determining whether you should make an estimated tax payment and, if so, how much to pay. As a reminder, this is not formal tax advice because every situation is different, so if you need personalized advice or guidance, please contact me or a tax professional to help you with this topic.