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Whenever estimated taxes are mentioned, most people think of business owners and the self-employed, but actually any kind of income that is not subject to withholding taxes may be subject to estimated tax. Whether the untaxed money comes from a job, investments, alimony or prizes, the IRS is demanding taxes owed, based on the well-known “pay-as-you-go” principle that the U.S. tax system is based on, which means that you must pay income tax as you earn or receive your income during the year.
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If the amount of income tax withheld from your salary or pension is not enough, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards, you may have to make estimated tax payments. If you are in business for yourself, you generally need to make estimated tax payments.
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Estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax.
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- If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.
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If you receive salaries and wages, you may be able to avoid paying estimated tax by asking your employer to take more tax out of your earnings. To do this, file a new Form W-4 with your employer.
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In most cases, you must pay estimated tax for 2017 if both of the following apply:
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- You expect to owe at least $1,000 in tax for 2017, after subtracting your withholding and refundable credits.
- You expect your withholding and refundable credits to be less than the smaller of:
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90% of the tax to be shown on your 2017 tax return, or |
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100% of the tax shown on your 2016 tax return. Your 2016 tax return must cover all 12 months. |
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The percentages mentioned may be different if you are a farmer, fisherman, or higher income taxpayer.
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You do not have to pay estimated tax for 2017 if you meet all three of the following conditions:
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- You had no tax liability for 2016.
- You were a U.S. citizen or resident alien for the whole year.
- Your 2016 tax year covered a 12-month period.
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| You had no tax liability for 2016 if your total tax was zero or you did not have to file an income tax return. |
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| To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. |
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| When figuring your 2017 estimated tax, it may be helpful to use your income, deductions, and credits for 2016 as a starting point. Use your 2016 federal tax return as a guide. You can use Form 1040-ES to figure your estimated tax. Nonresident aliens use Form 1040-ES (NR) to figure estimated tax. |
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| You must make adjustments both for changes in your own situation and for recent changes in the tax law. |
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| For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. 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. |
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| If a payment is mailed, the date of the U.S. postmark is considered the date of payment. Here are the payment periods and due dates for estimated tax payments. |
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| For the period: |
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Due date: |
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| Jan. 11 – March 31 |
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April 18 |
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| April 1 – May 31 |
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June 15 |
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| June 1 – Aug. 31 |
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Sept. 15 |
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| Sept. 1 – Dec. 31 |
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Jan. 16, next year. |
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| If the due date for an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next day that is not a Saturday, Sunday, or a holiday. |
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| If you file your 2017 Form 1040 or Form 1040A by January 31, 2018, and pay the rest of the tax you owe, you do not need to make the payment due on January 16, 2018. |
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You do not have to make estimated tax payments until you have income on which you will owe income tax. If you have income subject to estimated tax during the first payment period, you must make your first payment by the due date for the first payment period.
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You have several options when paying estimated taxes. You can:
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- Apply an overpayment from the previous tax year,
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- Pay all your estimated tax by the due date of your first payment, or
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| If you choose to pay in installments, make your first payment by the due date for the first payment period. Make your remaining installment payments by the due dates for the later periods. To avoid any estimated tax penalties, all installments must be paid by their due date and for the required amount. |
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| If you do not have income subject to estimated tax until a later payment period, you must make your first payment by the due date for that period. You can pay your entire estimated tax by the due date for that period or you can pay it in installments by the due date for that period and the due dates for the remaining periods. |
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| After you make an estimated tax payment, changes in your income, adjustments, deductions, credits, or exemptions may make it necessary for you to refigure your estimated tax. Pay the unpaid balance of your amended estimated tax by the next payment due date after the change or in installments by that date and the due dates for the remaining payment periods. |
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| The underpayment penalty is figured separately for each payment period. If you figure your payments using the regular installment method and later refigure your payments because of an increase in income, you may be charged a penalty for underpayment of estimated tax for the period(s) before you changed your payments. |
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| If you do not receive your income evenly throughout the year (for example, your income from a repair shop you operate is much larger in the summer than it is during the rest of the year), your required estimated tax payment for one or more periods may be less than the amount figured. |
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| The annualized income installment method annualizes your tax at the end of each period based on a reasonable estimate of your income, deductions, and other items relating to events that occurred from the beginning of the tax year through the end of the period. |
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| There are several ways to pay estimated tax. |
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- Credit an overpayment on your 2016 return to your 2017 estimated tax.
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- Pay by direct transfer from your bank account, or pay by debit or credit card using a pay-by-phone system or the Internet.
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- Send in your payment (check or money order) with a payment voucher from Form 1040-ES.
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After you start paying estimated taxes, be sure to keep a separate record of the dates you paid them and how much you sent for each period.
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| If you don't keep accurate records, it can take you longer to prepare your income tax return, and you may miss one or more of the payments you made. If you pay estimated taxes, be sure to claim credit for them when you file your income tax return. |
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Unless you live in one of the states that don’t have income taxes, don’t forget to make state estimated taxes too (you can get forms and vouchers for state payments from their respective websites and online payment services).
As always, we recommend that you rely on professional advice to make sure you don’t underpay or overpay your taxes, estimated and otherwise. |
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