Estimated payments - An Introduction & How To Make Them
What are estimated payments?
For the past 70+ years, the American taxpayer has been subject to withholding tax taken out of their paychecks or make estimated payments on their income. Before this, the U.S. Treasury did not require employers to withhold taxes from their employee's wages, and taxpayers were only required to pay income taxes at the end of the year. This lead to a cash flow issue and thus the Current Tax Payment Act of 1943 was enacted. This law requires employers to withhold on wages or estimated tax payments to be made.
Who must make estimated payments?
For most taxpayers, employers’ withholding on their paychecks takes care of their need to make estimated payments. However, if you have income that is not subject to withholding (Self-Employment, Interest, Rent Income, or Dividends, for example), it's best to check if you should be making estimated payments.
The IRS has a few general rules to follow to determine if you are required to make estimated payments. Generally, you will need to make them if both of the following apply:
- You expect to owe at least $1,000 in tax for 2019, after subtracting your withholding and refundable credits.
- You expect your withholding and refundable credits to be less than the smaller of:
- 90% of the tax to be shown on your 2019 tax return, OR
- 100% of the tax shown on your 2018 tax return.
Your 2017 tax return must cover all 12 months.
Some exceptions may apply. As well as special rules put in place for farmers, fisherman, household employers, and certain higher income taxpayers. More information can be found on the Form 1040-ES.
Checking your withholdings is important. If you owe more than $1,000, the IRS will have expected you to make estimated payments. Not doing so will result in a penalty from the IRS.
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When are estimated payments due?
Typically, estimated quarterly payments are due on the following dates:
- The 1st quarterly payment is due April 15th
- The 2nd quarterly payment is due June 15th
- The 3rd quarterly payment is due September 15th
- The 4th quarterly payment is due January 15th of the following year
Due dates for fiscal year taxpayers are the 15th day of the 4th, 6th, and 9th months of your current fiscal year and the 1st month of the following fiscal year.
Payment due dates that fall on a Saturday, Sunday, or legal holiday, the due date is the next business day.
If an estimated payment is made by a check, it’s important to make sure they are postmarked by the dates above. With each payment, you will need to create a payment voucher to send in as well.
How are estimated payment amounts figured?
If your prior year Adjusted Gross Income (AGI, line 37 on your 1040) was $150,000 or less, you can pay either 90 percent of this year’s income tax liability. Or pay 100 percent of your income tax liability from last year (dividing what your tax bill was last year into four equal payments).
If your prior year’s AGI was greater than $150,000, then you must pay either 90 percent of this year’s income tax liability or 110 percent of last year’s income tax liability. Whichever method you choose, it must be made in four equal quarterly payments.
The instructions/vouchers that the IRS provides also provide a worksheet for taxpayers to figure how much each quarterly payment should be.
Where do you send the payments?
Where you send your payments and vouchers is dependent upon which state you live in. Here is a list of states and the IRS location they should send estimated payments too.
Estimated payments for 1120S filers?
Although not nearly as common, s corporations may have an amount due at the end of the tax year. S corporations will typically owe if there is Excess net passive income, LIFO recapture tax. An s corporation may be required to file estimated payments if the tax liability can be expected to be over $500. S corporations will use Form 1120-W to make payments.
State Department estimated payments.
It is also wise to check with your state and local departments to see if you are required to make estimated payments. Most states will require it if you are required to make federal payments. More information can be found on our state tax summary page.
Most small business owners will need to make estimated payments for any income generated from the business. Generally speaking, most S corporations will not need to make estimated payments since the income generated from the business is “passed through” on to the shareholder.