What Are Estimated Tax Payments?

Estimated tax is the method used to pay tax on income not subject to withholding, such as income from self-employment, interest, dividends, alimony, and rent and gains from the sale of assets, prizes, and awards. You also may have to pay an estimated tax if the income tax being withheld from your salary, pension, or other income is insufficient. Here’s what you should know about estimated tax payments:

Filing and Paying Estimated Taxes

Both individuals and business owners may need to file and pay estimated taxes, which are paid quarterly. The first estimated tax payment of the year is ordinarily due on the same day as your federal tax return is due.

If you do not pay enough by the due date of each payment period, you may be charged a penalty even if you are due a refund when you file your tax return.

If you are filing as a sole proprietor, partner, S corporation shareholder, or self-employed individual, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. If you are filing as a corporation, you generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return.

If you had a tax liability for the prior year, you might have to pay estimated tax for the current year, but if you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings.

Special rules apply to farmers, fishermen, certain household employers, and certain higher taxpayers. Please call the office for assistance if any of these situations apply to you.

Who Does Not Have to Pay Estimated Tax

You do not have to pay estimated tax for the current year if you meet all three of the following conditions:

  • You had no tax liability for the prior year
  • You were a U.S. citizen or resident for the whole year
  • Your prior tax year covered a 12-month period

If you receive salaries and wages, you can avoid paying estimated tax by asking your employer to withhold more tax from your earnings. To do this, file a new Form W-4 with your employer. There is a special line on Form W-4 for you to enter the additional amount you want your employer to withhold. You had no tax liability for the prior year if your total tax was zero or you did not have to file an income tax return.

Calculating Estimated Taxes

To figure out your estimated tax, you must calculate your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. If you estimated your earnings too high, complete another Form 1040-ES, Estimated Tax for Individuals, worksheet to re-figure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated tax for the next quarter.

Try to estimate your income as accurately as possible to avoid penalties due to underpayment. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholding and credits or if they paid at least 90 percent of the tax for the current year or 100 percent of the tax shown on the return for the prior year, whichever is smaller.

When figuring out your estimated tax for the current year, it may be helpful to use your income, deductions, and credits for the prior year as a starting point. Use your prior year’s federal tax return as a guide, and use the worksheet in Form 1040-ES to figure your estimated tax. However, you must adjust to any changes in your situation as well as recent tax law changes.

Estimated Tax Due Dates

For estimated tax purposes, the year is divided into four payment periods, each with a specific payment due date. For the 2023 tax year, these dates are April 18, June 15, September 15, and January 16, 2024.

If you file your 2023 tax return by January 31, 2024, and pay the entire balance due with your return, you do not have to pay estimated taxes in January.

If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return.

Electronic Federal Tax Payment System

The easiest way for individuals and businesses to pay their estimated federal taxes is to use the Electronic Federal Tax Payment System (EFTPS). Make ALL of your federal tax payments, including federal tax deposits (FTDs), installment agreements, and estimated tax payments, using EFTPS. If it is easier to pay your estimated taxes weekly, bi-weekly, monthly, etc., you can, as long as you have paid enough by the end of the quarter. Using EFTPS, you can access a history of your payments to know how much and when you made your estimated tax payments.

Don’t hesitate to call if you have any questions about estimated tax payments or need assistance setting up EFTPS.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

Estimated tax payments for farmers

By Evan Benevento

Did you know that farmers have different and more generous estimated tax requirements than most other taxpayers? A typical taxpayer may be required to pay estimated taxes on a quarterly basis, in four equal installments throughout the year on April 15th, June 15th, September 15th, and January 15th of the following year. For qualified farmers, income can be highly seasonal and unpredictable leading to irregular quarterly tax payments under the traditional rules. If you are a qualified farmer, you may be eligible to take advantage of more favorable estimated tax rules such as delaying quarterly payments.

A qualified farmer is an individual in the current year that has at least two-thirds of his or her gross income from farming in both the current AND prior year. For example, a qualified farmer for 2020 will have 66% of his or her gross income from farming in both 2019 and 2020. If this is the first year with a qualified farming activity, then the taxpayer does not need to include the prior year.

All taxpayers can avoid penalties for underpayment of estimated tax by abiding by one of the two “safe harbors” for estimated tax payments. The first is the “prior year safe harbor” method where you are not penalized so long as you pay 100% of your prior-year tax liability (110% if AGI is over $150k) in quarterly estimated tax installments throughout the year. The second method is the “current year safe harbor” which applies so as long as you pay in at least 90% of your actual tax liability for the current year.

For a traditional business owner with steady/predictable income, making quarterly estimates at either of the two safe harbor amounts is relatively straightforward. However, qualified farmers can choose to pay no estimated taxes throughout the year as long as they file their complete income tax return and pay all tax due by March 1st of the following year. Alternatively, if the taxpayer knows that he or she won’t be able to file and pay by March 1st, they can make one estimated tax payment by January 15th of the following year which is also known as the “required annual payment”. This payment is the smaller of 66% (2/3) of your total current year tax, or 100% of the total tax listed on your prior year return. Under either method available to farmers, the result is deferral of most estimated taxes due for the entire calendar year and into the following year.

Farmers typically have unpredictable and seasonal income that make paying traditional quarterly estimated taxes a cash-flow burden that can be difficult to calculate. By utilizing one of the alternatives covered in this article, a qualified farmer is able to preserve cash flow in lean periods and reduce the risk of underpayment penalties.

Please reach out if you have more questions or would like more information on the estimated tax rules for qualified farmers. We’re here to help! Please call 831-726-8500 or email@wheelercpa.com.