Like cold weather or the inevitable realization that your New Year’s resolutions may have been over-ambitious, tax season is looming…and that means it’s time to get your financial records in order.
For some taxpayers, this also means making sure your estimated tax payments are covered.
When you’re self-employed, a contractor, an investor, or a small business owner, a portion of your income may not have taxes automatically withheld.
This is where estimated tax payments come in, serving as a way to prepay taxes regularly to the IRS and avoid a hefty tax bill when returns are due — not to mention the burdensome penalties and fines that can result from falling behind!
So, what exactly are estimated taxes and quarterly estimated tax payments, who needs to make them, when are the deadlines, and how can you avoid penalties?
Keep reading for a comprehensive overview of your 2023 and 2024 obligations.
Estimated taxes are periodic payments made to the IRS by certain individuals and businesses on income not subject to withholding, including income from self-employment, interest, dividends, rent, alimony, and gains from the sale of assets, among other sources.
Put another way: All taxpayers must pay taxes throughout the year and then file their returns to get any money back they may be owed. If you are an employee, your employer typically withholds that income from your pay (tax may also be withheld from certain other income such as IRAs, pensions, bonuses, commissions, and gambling winnings).
However, some taxpayers, like self-employed individuals, small business owners, and those who receive substantial income outside of wage withholding, typically do not have those taxes withheld — so they need to handle it by making estimated tax payments.
You may be required to pay an estimated tax if you are:
Essentially, estimated taxes apply any time you receive income, not subject to withholding exceeding $1,000 in tax liability.
This encompasses a broad range of everyday situations for those earning non-payroll income — and even if you have taxes withheld from W-2 wages, non-wage income may trigger estimated tax requirements.
If you receive W-2 wages, boosting your payroll tax withholding can eliminate estimated quarterly taxes. Simply file an updated W-4 with your employer, using line 4c to elect extra withholding amounts.
You also bypass estimated tax if last year all three of the following were true of you:
Estimated tax payments are generally made quarterly. In 2023, the first three quarterly deadlines were:
Hopefully, if you are subject to estimated taxes, you have already made your payments on or before each of those deadlines.
The fourth and final deadline for the 2023 tax year is January 16th, 2024.
In 2024, the quarterly deadlines you need to know are as follows:
The difference in dates is due to weekends and holidays — typically, the deadlines fall on the 15th, but they generally are shifted to the closest following business day.
If you miss a quarterly estimated tax payment, the IRS may impose penalties and interest on the amount of underpayment. Interest accrues from the due date of the payment until the date of payment.
The penalty is calculated based on a percentage of the underpayment, which can change quarterly, and it’s compounded daily. (The IRS uses Form 2210 to determine the amount of underpayment and the penalty).
However, if you promptly make up the missed payment, the penalty amount may be reduced. Additionally, overpaying in later quarters can offset the underpayment from earlier in the year.
Furthermore, there is also a “safe harbor” rule that can protect you from penalties if you pay either 90% of the current year’s tax or 100% of the prior year’s tax (110% if your adjusted gross income is above a certain threshold).
In certain circumstances, such as with unusual events or disasters, the IRS may offer relief from penalties. If you can show reasonable cause for the underpayment and not willful neglect, the IRS may waive penalties entirely. (Don’t count on that, though!)
It’s important to address missed payments as soon as possible to minimize penalties and interest. If you’re unsure of how to proceed, consider consulting with a tax professional for guidance specific to your situation.
Determining how much you’ll owe in taxes for any given year is critical for accurately making your four estimated payments to the IRS.
Follow these steps when planning your prepaid tax obligations:
If your income varies throughout the year, you may need to recalculate your estimated taxes before each payment due date. If you find this process overwhelming, using tax software or consulting with a tax professional might be beneficial.
Paying your estimated taxes can be done through several methods:
Always keep records of your payments, including amounts and dates, in case you need to reference them later or prove payment to the IRS. Submitting payments by the due dates is essential to avoid potential penalties for late payment.
Bottom line: Receiving income not subject to withholding does not exempt you from tax obligations.
Reach out if you need assistance. Our team of experts stands ready to help you understand your requirements and optimize your obligations.
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Above & Beyond
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Jeff Coyle, CPA, Partner of Rosenberg Chesnov, has been with the firm since 2015. He joined the firm after 20 years of business and accounting experience where he learned the value of accurate reporting, using financial information as a basis for good business decisions and the importance of accounting for management.
He is a diligent financial professional, able to manage the details and turn them into relevant business leading information. He has a strong financial background in construction, technology, consulting services and risk management. He also knows what it takes to create organizations having built teams, grown companies and designed processes for financial analysis and reporting.
His business experience includes:
Creating and preparing financial reporting, budgeting and forecasting.
Planning and preparation of GAAP and other basis financial statements.
Providing insight on financial results and providing advice based on those results.
Jeff also has a long history of helping individuals manage their taxes and plan their finances including:
Income tax planning and strategy.
Filing quarterly and annual taxes.
General financial and planning advice.
Prior to joining the firm in 2015, Jeff was in the private sector where he held senior financial and management positions including Controller and Chief Financial Officer. He has experience across industries, including construction, technology and professional services which gives him a deep understanding of business.
Jeff graduated from Montclair State University, he is a CPA and member of the American Institute of Certified Public Accountants, New York State Society of Certified Public Accountants and New Jersey State Society of Public Accountants.
Jody H. Chesnov, CPA, Managing Partner of Rosenberg Chesnov, has been with the firm since 2004. After a career of public accounting and general management, Jody knows the value of good financials. Clarity, decision making, and strategy all start with the facts – Jody has been revealing the facts and turning them into good business results for more than three decades.
He takes a pragmatic approach to accounting, finance and business. His work has supported many companies on their path to growth, including helping them find investors, manage scaling and overcome hurdles. His experience and passion for business reach beyond accounting and he helps businesses focus on what the numbers mean organizationally, operationally and financially.
He has a particular expertise in early-stage growth companies. His strengths lie in cutting through the noise to come up with useful, out of the box, solutions that support clients in building their businesses and realizing their larger visions.
Prior to joining the firm in 2004, Jody was in the private sector where he held senior financial and management positions including General Manager, Chief Financial Officer and Controller. He has experience across industries, which gives him a deep understanding of business.
Jody graduated with a BBA in Accounting from Baruch College, he is a CPA and member of the American Institute of Certified Public Accountants and New York State Society of Certified Public Accountants.
In addition to delivering above and beyond accounting results, Jody is a member of the NYSCPA’s Emerging Tech Entrepreneurial Committee (ETEC), Private Equity and Venture Capital Committee and Family Office Committee.
He is an angel investor through the Westchester Angels, and has served as an advisor for many startup companies and as a mentor through the Founders Institute.
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