Estimated taxes for individuals: The who, what, where, when and why

According to the IRS website, “the U.S. tax system operates on a pay-as-you-go basis.” But what does that actually mean for American taxpayers? The concept of estimated taxes is not overly complicated, yet many people do not fully understand what these payments are, or how they work.

So, let’s break down the basics of estimated taxes.

What are estimated taxes?

To put it simply, the IRS wants you to pay a sizeable portion of what you owe in taxes before April 15. Most U.S. employees have federal and state tax withholdings regularly taken out of their wages, which may cover their tax payments for the year.

These tax payments are intended to ensure that you have paid enough tax by April 15. However, under certain circumstances (as outlined below), people need to make estimated tax payments, which are essentially pre-payments required by the government.

However, if you fail to make quarterly tax payments in the correct amounts, then the IRS will assess you penalties that make you pay additional money to the government.

Who needs to pay estimated taxes?

Generally, you owe estimated taxes if you aren’t having tax withheld during the year. The most common rule is that if you expect to owe at least $1,000 when you file your annual tax return, then you need to make estimated tax payments during the year.

Additionally, if you earned significant income in addition to your employment wages – perhaps from dividends, interest or capital gains, or if you own a business or are self-employed – then you generally have to make estimated tax payments.

The estimated tax formula is fairly straight-forward. Generally speaking, you either need to pay at least 90% of your current year’s taxes or 100% of your prior year’s taxes, whichever is less. If your annual income is above $150,000, then your second option is to pay 110%, not 100%, of your prior year’s taxes.

When do you have to pay estimated taxes?

If you fall into one of the above categories, then you’ll have to pay estimated taxes quarterly – by April 15, June 15, Sept. 15 and Jan. 15 – to ensure you have paid enough by the time the following April 15 rolls around.

If any of those dates fall on a weekend or a holiday, then the deadline moves to the next business day.

The 2022 tax deadlines are:

• April 18, 2022 – first quarter (Jan. 1 to March 31)
• June 15, 2022 – second quarter (April 1 to May 31)
• Sept. 15, 2022 – third quarter (June 1 to Aug. 31)
• Jan. 17, 2023 – fourth quarter (Sept. 1 to Dec. 31)

You can also pay estimated taxes more frequently – for instance, monthly instead of quarterly, or all at once during the first quarter – if you so choose. You just need to make sure that you are estimating your annual taxes very precisely. 

How do you calculate your estimated taxes?

There are two ways to calculate quarterly tax estimates.

You can estimate the amount of tax you’ll owe for the year, and then send one-quarter of that to the IRS. For instance, if you basically know that you’ll owe $20,000 in taxes over the course of 2022, then you can send $5,000 in estimated taxes to the IRS for each of the four quarters.

Alternatively, you can estimate your taxes based on what you have already earned during the year. If you earn income unevenly – perhaps you earn 80% of your income in the summer months – then you can make unequal estimated tax payments. This process, which is known as annualizing your income, could help you avoid a penalty.

In terms of what you need to create an accurate estimate of your taxes owed, you should consult your prior year’s tax return and any tax paperwork from the current year, including any estimated tax payments and withholdings that you have already made to that point. Of course, you also will need to have a solid estimate of your expected gross income for the year, as well as any deductions and credits that you plan to use.

Where do you pay estimated taxes?

There are several ways to pay your estimated taxes. The IRS (and almost every state) allows you to pay online – and that is certainly the best option. The payment will end up where you want it to go, and you’ll know when the respective government receives it. In fact, you’ll have a receipt to prove it. You can also mail a check or money order to the IRS or the State, or pay through the IRS2GO mobile app, or by phone.

How Baker Tilly can help

Baker Tilly’s individual tax team understands all the rules, guidelines and potential penalties involved with estimated tax payments. The calculations can get complicated and obviously the amount of money can be significant, so it helps to work with a team of specialists that can walk you through a variety of potential issues and a set of tailored solutions.

To learn more about Baker Tilly’s tax capabilities or to discuss your specific situation, connect with us.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.