What Is Estimated Tax? Feb 7, 2025

Understanding Estimated Tax:

Estimated tax refers to the method of paying tax on income that is not subject to withholding. This includes income from sources such as self-employment, interest, dividends, alimony, capital gains, rental income, and prizes. If you’re an independent contractor, business owner, or receive other non-wage income, you’re likely required to make these payments.

Estimated tax is not only used to cover income tax, but also self-employment tax and alternative minimum tax (AMT) if applicable.

Why Estimated Tax Matters?

If you do not pay enough tax throughout the year — either through withholding or estimated payments — the IRS may assess a penalty for underpayment, even if you're owed a refund. To avoid this, it's important to make timely and accurate quarterly payments.

Who Needs to Pay Estimated Tax?

Estimated tax generally applies to:

1. You had no tax liability in the previous year
2. You were a U.S. citizen or resident for the entire year
3. Your previous tax year covered 12 full months

If you earn wages or salaries, you can adjust your Form W-4 to have more tax withheld from your paycheck, which may eliminate the need for estimated tax payments.

How To Calculate Estimated Tax:

To calculate estimated tax, you need to project your:

• Adjusted gross income (AGI)
• Taxable income
• Deductions and credits
• Total taxes owed

Use your prior year’s return as a guide, and adjust for any expected changes. Individuals typically use Form 1040-ES and corporations use Form 1120-W to estimate and track their payments.

If your income fluctuates throughout the year, you can update your calculations and re-submit the worksheet each quarter.

When Are Estimated Tax Payments Due?

The IRS divides the year into four payment periods, each with its own deadline:

• Q1: April 15, 2025
• Q2: June 16, 2025
• Q3: September 15, 2025
• Q4: January 15, 2026

You can pay weekly, bi-weekly, or monthly — as long as you've paid enough by the end of each quarter.

Payments can be made online through the Electronic Federal Tax Payment System (EFTPS), which is the preferred method for both individuals and businesses.

Penalties for Underpayment:

You may face an underpayment penalty if:

• You owe $1,000 or more in tax after subtracting withholdings and credits
• You did not pay at least 90% of the tax for the current year, or 100% of last year's tax (whichever is smaller)

Special provisions may apply if you are a farmer or fisherman.

The penalty may be waived if:

• The underpayment was due to a casualty, disaster, or extraordinary event
• You retired or became disabled and the underpayment was due to reasonable cause

Use Form 2210 (for individuals) or Form 2220 (for corporations) to determine whether a penalty applies.

Final Thoughts:

Staying ahead of your estimated tax responsibilities can save you time, money, and unnecessary stress. If you're unsure about your requirements, or need help with calculations and filing, our team is here to assist.

Contact us today to schedule a consultation and ensure your estimated taxes are paid accurately and on time.

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