Should I Pay Quarterly Estimated Taxes?

In general, if you have income that didn’t have taxes withheld, regardless of whether the income was from a job, a business, investments, alimony, or any other source, then you may need to pay quarterly estimated taxes.  Quarterly estimated payments are paid to the U.S. Treasury using Form 1040-ES vouchers.  Most states that have an income tax use a similar type of form.

The four estimated tax payments are generally due each year on the 15th of April, June, September, and the January following the year end for individuals.  If that date falls on a weekend or federal holiday, the filing deadline is the next business day.

The IRS prefers you figure the total estimated tax for the entire year, divide it by four, and send in equal payments according to the schedule though there are methods to pay unequal quarterly payments and still avoid penalties and interest.

The IRS has several methods to pay estimates.  You can send a paper check with the Form 1040-ES voucher, file electronically by using a credit card (processing fees apply), the Electronic Federal Tax Payment System (EFTPS), or the IRS’ Direct Pay option.

The IRS considers you in compliance with estimated taxes as long as you pay either 90% of the current year total tax liability or a “safe harbor” amount based on a percentage of the total tax liability in the previous year.  On the 2014, Form 1040, line 63, Total Tax is your tax liability.

The safe harbor amount protects you from IRS penalties on your income tax underpayment.  Many taxpayers pay the safe harbor amount based on their prior year’s total tax liability because it gives them a specific number to work with.  Even better, it protects them from penalties and interest, regardless of how high their upcoming final tax liability is.

For taxpayers with a previous year’s adjusted gross income of more than $150,000 for married couples filing jointly and single taxpayers, or $75,000 for married taxpayers filing separately, the safe harbor amount is 110% of the previous year’s total tax liability.  If the previous year’s adjusted gross income is at or below these thresholds, then the safe harbor amount if 100% of the previous year’s total tax liability.

It is possible to avoid paying quarterly estimated tax payments by increasing the withholding on wages, retirement income, annuities, unemployment benefits, Social Security benefits, and any other income source that tax can be withheld.

As part of the tax preparation process, we will calculate your safe harbor estimates if they are needed.  We will also work with you to estimate your next year’s tax liability and the best method to avoid penalties and interest on the underpayment of taxes.