Learning About Finance Topics

Should You Be Making Estimated Tax Payments? How To Know

by Laurie Washington

No one enjoys paying income taxes, but for most Americans the process is nearly invisible when those tax payments are taken from one's weekly paycheck. However, certain individuals and entities may need to contend with a different type of tax payment: estimated taxes. What are estimated taxes and who might need to pay them? Here are a few answers.

What Are Estimated Taxes?

Estimated taxes are simply payments made throughout the year in order to satisfy your expected tax debt for that year. For most people who earn wages or a salary, the employer essentially makes periodic payments on their behalf by withholding that money from paychecks and remitting it to the IRS and their state tax agencies.

However, if you don't have that money withheld, you may need to pay your tax obligation in portions due on selected days through the year. For calendar year taxpayers, this is generally on April 15, June 15, September 15, and December 15. Each payment should be at least 25% of any expected tax bill that will be than $1,000 larger than your annual amount withheld. 

Do You Need to Pay Estimated Taxes?

So, who may need to investigate whether or not they are subject to estimated taxes? As mentioned, any taxpayer who doesn't have enough withheld could be liable for payments. This might include those whose taxes are particularly high in a given year, people who earn significant income from other sources (such as pensions, IRA or 401(k) withdrawals, or royalties), or anyone who experienced a taxable windfall. 

The main pool of taxpayers who must deal with estimated taxes are business persons. Independent contractors and those who run a sole proprietorship nearly always need to make estimated payments because no one is withholding money from their earnings. And these individuals usually are subject to additional self-employment taxes as well. Members of a partnership will be liable for income tax on their earnings and so should usually pay estimated taxes.

Corporations are liable for their own taxes (unlike sole proprietorships and partnerships), so the burden of making estimated taxes falls on the company rather than the individuals. The corporation must usually do so if their tax liability is greater than $500. 

Where Should You Get Help with Estimated Taxes?

Do you suspect that you may need to arrange for estimated tax payments? The rules around payments can be complicated for most laypersons. You'll need to determine what your estimated income will likely be, what the minimum amount due is, and how your payments must measure up to the prior year's tax bill.

To do this properly, meet with a CPA (certified public accountant) as early in the year as possible. Their expertise will help ensure that you don't end up owing any penalties, interest, or big tax bills during filing seasons.