Know the Law: Estimated Tax Payments

Kolbie R. Deamon
Associate, Tax Department
Published: Union Leader
February 16, 2020

Q: What are estimated tax payments? How do they work and who is required to pay them?

A: Like many of us, the Internal Revenue Service prefers not to wait for the money it’s owed.

For this reason, the IRS requires taxpayers who receive income not subject to withholding to estimate and periodically pay the tax due on such income as it is earned. The IRS imposes penalties on taxpayers who fail to make timely and sufficient estimated payments. Therefore, it is important to know whether you are required to make estimated payments and, if so, in what amounts.

Forms of income not always subject to withholding include income from self-employment, interest, dividends, rent, gains from the sale of assets, prizes, awards, alimony, unemployment compensation, and the taxable portion of social security benefits. If you receive any one of these forms of income, then you should consider whether you are required to make estimated tax payments to the IRS.

If you expect to owe the IRS more than $1,000 in tax for 2020 (after subtracting your withholding and refundable credits) and you expect that your federal withholding and refundable credits will be less than the smaller of: (A) 90% of the tax you will owe for the current tax year or (B) 100% of the tax you owed in the prior year, then you are required to pay quarterly estimated tax payments to the IRS.

To determine the amount of the estimated payments you should make to the IRS, you will need to estimate your tax liability for the year by estimating your adjusted gross income, taxable income, deductions, and credits. Each payment of estimated tax should be approximately 25% of the tax you will owe for the income you receive that is not subject to withholding. The IRS offers Form 1040-ES, “Estimated Tax for Individuals,” to aid taxpayers in calculating the amount of their estimated tax payments.

Estimated tax payments are due on April 15, June 15, and Sept. 15 of the current year and Jan. 15 of the following year. If any of these due dates falls on a weekend or holiday, then the estimated payment is due on the next business day. If you file your tax return by Jan. 31 of the following year and pay the entire balance due at the same time, then you are not required to make the January payment.