As a reminder, today, Q2 estimated federal tax payments are due. To avoid tax penalties (discussed below), you will need to have your payment postmarked by today.
Remember that estimated tax payments are for taxes owed on income that is not subject to withholding. It includes income from dividends, rents, alimony, self-employment, and possibly unemployment benefits (if you did not have the government voluntary withhold taxes owed).
Estimated Tax Payments and the Employed
Employers are required to withhold a percentage of the earned income to be applied toward annual tax liabilities. Taxes withheld from your paycheck by your employer are then sent to the IRS to reduce the amount you owe on your annual earned income. If the amount withheld is not sufficient to cover tax liabilities, estimated tax payments may be required. To avoid having to make estimated payments, complete another W-4 and give it to your employer with the correct withholding information if you believe you owe taxes.
Who Is Required to Make Estimated Tax Payments
With states, the laws may be different, but with the IRS taxpayers with income not subject to withholding would be required to make estimated payments. If you expect to owe $1k in federal tax for 2011 and your withholding and credits to be less than the smaller of 1.) 90% of your taxes on your 2011 tax return, or 2.) 100% of your taxes owed in 2010–then you will need to make estimated payments. If you made $150k or more in 2010, then replace 100% with 110% in the rule above.
Estimated Tax Payment Due Dates
Estimated tax payments are due quarterly. First-quarter payments – which cover the period between January 1 and March 31 – are generally due on April 15th. Second-quarter payments are due on June 15th and cover the period between April 1 and May 31. Third-quarter payments covering June 1 through August 31 are due on September 15th with the fourth quarter or remainder of the year due on January 15th. For the 2011 tax year, the 1st quarter due date was April 18th, and the 4th quarter estimated tax payment is due January 17, 2012. Slight changes in due dates may occur due to Federal holidays or due dates falling on a weekend.
Calculating Estimated Tax Payments
There are shortcuts to figuring out estimated quarterly federal or state payments, but they generally do not apply to all possibilities (sources and types of income).
If you are W-2 employee and you don’t have additional income, then in most cases your employer should be correctly withholding your taxes owed, and you do not have to worry about estimated tax payments. If they are not, you can request to change your withholding with your employer (as discussed above). As added assistance, the IRS has a good online estimated tax withholding tool if you are an employee.
For all other taxpayers, it is best to use Form 1040-ES to calculate estimated tax payments because it serves as a great resource if you are not working with a tax professional. It includes tax rate schedules, instructions, and an estimated tax worksheet (and possibly the self-employment one if applicable). When in doubt, consult a CPA or tax licensed tax preparer.
Paying Estimated Tax Payments
Knowing how much you have to pay and when the only question remaining is where to send payments. Payments can be mailed to the IRS using Form 1040-ES. Always note your Social Security number in the memo section of your check which can be made payable to “United States Treasury.” A quicker and easier way to make estimated payments is online. The Electronic Federal Tax Payment System provides the option of setting up reoccurring monthly payments as well as report options which can be printed and used when filing your income tax return.
Late Payment Penalty
Failure to make your estimated payments can trigger a late payment penalty from the IRS. The late payment penalty will be in addition to the amount you originally owed for federal taxes. The penalty will apply only to the amount of taxes owed if there were tax underpayments.