How to Avoid an Underpayment Penalty for Estimated Tax Payments

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Estimated Tax Payment Deadlines

The IRS’s expectation is that, by the time you get to the April 15th federal tax deadline, you’ll have paid a minimum of 90% of your total tax amount in estimated taxes. If you are a non-W-2 employee, such as a contract employee, or are self employed, you’ll be required to pay estimated taxes throughout the year in order to meet this 90% payment. 

In order to ensure a regular flow of taxpayer money, the IRS has designated four quarterly dates each year as estimated tax deadlines. It is expected that a taxpayer pay 25% of their estimated taxes by each deadline. Those deadlines are: 

  • April 15th
  • June 15 
  • September 15th 
  • January 15th 

If you’d like to pay more regularly, such as a monthly payment or every other month payment, it’s totally within your power to do so. Some estimated tax taxpayers prefer to pay estimated taxes on a monthly basis in order to manage their budget more closely. 

Estimated taxes must be paid on their due date, or you may be subject to a penalty for late payment. If paying by mail, be sure that your mail is postmarked either on or before the due date in order for it to be on time. If paying by IRS Direct Pay, the payment must be sent by 8 PM PST on the day of the deadline. If bycredit or debit card, the payment must be sent by midnight on its due day. 

How Much Do I Need to Pay in Estimated Taxes?

There are a few different ways to go about calculating your estimated tax payments. If you expect this year’s income, credits, deductions, and more to be fairly similar to last year’s, then it’s a good idea to use that as your guide. Look for your total tax liability, meaning the total amount of tax that you owed, and divide that number by four. What you’ll be left with is a good indication of how much you should pay at each quarterly tax payment. If you expect your income to go up slightly, say 10%, then you can simply increase that number by 10% in order to ensure that you’ll meet the 90% payment mark. 

If you expect your income, credits, and deductions to be substantially different than last year’s, you can use IRS Form 1040-ES to calculate your estimated tax payments. You’ll begin with your expected income for the year, as well as your expected credits and deductions, and calculate your taxes using those figures and your tax rate based on your income. Then, you’ll multiply this number by 90% and divide it into 4 payments. What you’ll be left with is your estimated quarterly tax payments for the year. 

If you want to pay your estimated taxes on a more regular basis, you can divide your total tax amount by whatever increment you’d like to pay in; four quarterly payments is simply the minimum. 

Remember that it’s always better to overpay your estimated tax payments than underpay. If you overestimate your tax payments and give the IRS too much, you’ll receive a refund back at the end of the year.